Key Figures

VOLKSWAGEN FINANCIAL SERVICES AG

€ million (as of Dec. 31) 2020 2019

Total assets 117,845 112,444 Loans to and receivables from customers attributable to Retail financing 21,006 20,712 Dealer financing 4,272 5,413 Leasing business 39,984 39,951 Lease assets 27,311 22,776 Equity 12,760 12,029 Operating profit 1,223 1,223 Profit before tax 1,038 1,264

in percent (as of Dec. 31) 2020 2019

Cost/income ratio1 57 54 Equity ratio2 10.8 10.7 Return on equity3 8.4 12.6

Number (as of Dec. 31) 2020 2019

Employees 10,880 10,773 Germany 5,789 5,763 International 5,091 5,010

1 General and administrative expenses, adjusted for expenses passed on to other entities in the Volkswagen Group / interest income from lending transactions and marketable securities, net income from leasing transaction, interest expenses, net income from service contracts, net income from insurance business, provision for credit risks and net fee and commission income. 2 Equity/total assets. 3 Profit before tax / average equity.

RATING (AS OF DEC. 31 ) STANDARD & POOR’S MOODY’S INVESTORS SERVICE

Short­term Long­term Outlook Short­term Long­term Outlook

Volkswagen Financial Services AG A­2 BBB+ negative P­2 A3 negative

All figures shown in the report are rounded, so minor discrepancies may arise when amounts are added together. The comparative figures from the previous fiscal year are shown in parentheses directly after the figures for the current fiscal year.

COMBINED MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENTS ADDITIONAL INFORMATION 04 Fundamental Information about the Group 43 Income Statement 171 Responsibility Statement 08 Report on Economic Position 44 Statement of Comprehensive Income 172 Independent Auditor’s Report 19 Volkswagen Financial Services AG 45 Balance Sheet 179 Report of the Supervisory Board (Condensed, in accordance with the 47 Statement of Changes in Equity

HGB) 48 Cash Flow Statement 22 Report on Opportunities and Risks 49 Notes to the Consolidated Financial 31 Human Resources Report Statements 36 Report on Expected Developments

COMBINED MANAGEMENT REPORT 04 Fundamental Information about the Group 08 Report on Economic Position 19 Volkswagen Financial Services AG (Condensed, in accordance with the HGB) 22 Report on Opportunities and Risks 31 Human Resources Report 36 Report on Expected Developments

4 Fundamental Information about the Group Combined Management Report

Fundamental Information about the Group

Volkswagen Financial Services AG and its companies are providers of comprehensive mobility services.

BUSINESS MODEL ORGANIZATION OF THE VOLKSWAGEN FINANCIAL SERVICES AG Over the years, the companies in the Volkswagen Financial GROUP Services AG Group have evolved increasingly dynamically The companies of the Volkswagen Financial Service AG Group into providers of comprehensive mobility services. The key provide financial services to private, corporate and fleet cus­ objectives of Volkswagen Financial Services AG are: tomers. The close integration of marketing, sales and cus­ tomer service focused on customers’ needs should play a > To promote Group product sales for the benefit of the decisive role in keeping the processes lean and implementing Volkswagen Group brands and the partners appointed to the sales strategy efficiently. distribute these products > To strengthen customer loyalty to Volkswagen Financial INTERNAL MANAGEMENT Services AG and the Volkswagen Group brands along the The Company’s key performance indicators are determined automotive value chain (among other things, by targeted on the basis of IFRSS and are presented as part of the internal use of digital products and mobility solutions) reporting system. The most important non­financial perfor­ > To create synergies for the Group by pooling Group and mance indicators are penetration, current contracts and new brand requirements in relation to finance and mobility contracts. The financial key performance indicators are the services volume of business, operating result, return on equity and > To generate and sustain a high level of return on equity for the cost/income ratio. the Group

Volkswagen Financial Services AG | Annual Report 2020 Combine d Management Report Fundamental Information about the Group 5

KEY PERFORMANCE INDI CATORS

Definition

Nonfinancial performance indicators Penetration Ratio of new contracts for new Group vehicles under retail financing and leasing business to deliveries of Group vehicles, based on Volkswagen Financial Services AG’s consolidated entities. Current contracts Contracts recognized as of the reporting date New contracts Contracts recognized for the first time in the reporting period

Financial performance indicators Volume of business Loans to and receivables from customers arising from retail financing, dealer financing, leasing business and lease assets. Operating result Interest income from lending transactions and marketable securities, net income from leasing transactions, interest expense, net income from service contracts, net income from insurance business, provision for credit risks, net fee and commission income, net gain or loss on hedges, net gain or loss on financial instruments measured at fair value and on derecognition of financial assets measured at fair value through other comprehensive income, general and administrative expenses and net other operating income/expenses Return on equity Return on equity before tax, which is calculated by dividing profit before tax by average equity. Cost/income ratio General and administrative expenses, adjusted for expenses passed on to other entities in the Volkswagen Group / interest income from lending transactions and marketable securities, net income from leasing transaction, interest expenses, net income from service contracts, net income from insurance business, provision for credit risks and net fee and commission income.

OTHER NONFINANCIAL P ERFORMANCE INDICATORS CHANGES IN EQUITY INVESTMENTS Customer satisfaction and external employer ranking are also The following material changes in equity investments have measured. occurred: Effctive January 16, 2020, Volkswagen Financial Services

Customer Satisfaction AG, Braunschweig, acquired ca. 4 % of the shares in sunhill Achieving a high level of customer satisfaction is a key objec­ technologies GmbH, Erlangen, from the previous minority tive of Volkswagen Financial Services AG’s activities: the aspi­ shareholders thereby increasing its shareholding to 100 %. ration is to ensure that customers are completely satisfied. On February 3, 2020, Volkswagen Pon Financial Services

With this in mind, Volkswagen Financial Services AG has B.V., Amersfoort, Netherlands, (60 % of the shares in which are determined the level of both external and internal customer held by Volkswagen Finance Overseas B.V., Amsterdam, Neth­ satisfaction in its markets over the last few years. The key erlands) acquired 57.97 % of the shares in the leasing compa­ figures that have been used to date are now being revised ny Muntstad Auto Lease B.V., Zeist, Netherlands, from Phima within the Volkswagen Group in response to the changes in B.V., Nijkerk, Netherlands. customer needs, the product offering and the strategic focus Effective February 14, 2020, Volkswagen Finance Overseas of Volkswagen Financial Services AG. B.V., Amsterdam, Netherlands, a wholly owned subsidiary of Volkswagen Financial Services AG, acquired one share of External Employer Ranking Volkswagen Finance Belgium S.A., Brussels, Belgium, that had A strategic key performance indicator has been specified for been previously held by Volkswagen Financial Services N.V., financial services activities: external employer ranking. Amsterdam, Netherlands; this transaction was carried out as This involves Volkswagen Financial Services AG submit­ a result of a change in Belgian company law. As a conse­ ting itself to external benchmarking, generally on a two­year quence, Volkswagen Finance Overseas B.V. now holds all of cycle. the shares in Volkswagen Finance Belgium S.A. The Company’s aim is to position itself as an attractive On February 21, 2020, Volkswagen Financial Services employer and determine appropriate measures that will ena­ AG acquired 26 % of the shares in Glinicke Leasing GmbH, ble it to become a top­20 employer by 2025, not just in Europe, Kassel, from Glinicke Finanz Holding GmbH & Co. KG, but globally. For example, Volkswagen Financial Services AG Kassel. The purpose of this equity investment is, inter alia, was represented in various national and international best­ to include business bike leasing in the range of products employer rankings the last time it participated in 2019. Com­ offered to German fleet customers. In the meantime, the ing in eleventh place, it was among the top European employ­ company has been renamed to Digital Mobility Leasing ers in the “Great Place to Work” employer competition. GmbH.

Volkswagen Financial Services AG | Annual Report 2020 6 Fundamental Information about the Group Combined Management Report

Effective February 28, 2020, Volkswagen Financial Services AG Financial Services AG. The purpose of the spin­off and merger transferred the following equity investments to Volkswagen was to support the internal restructuring of the leasing busi­ Finance Overseas B.V., Amsterdam, Netherlands, a wholly ness in Poland. owned subsidiary of Volkswagen Financial Services AG, by On May 29, 2020, Volkswagen Finance Overseas B.V., Am­ means of a contribution in kind: sterdam, Netherlands, a wholly owned subsidiary of Volkswagen Financial Services AG, founded Volkswagen Mo­

> Its 100 % equity investment in sunhill technologies GmbH, bility Services S.p.A., Bolzano, Italy. The purpose of establish­ Erlangen ing this company is to transfer the business activities of

> Its 100 % equity investment in PayByPhone Technologies Volkswagen Leasing GmbH´s branch in Italy to a separate Inc., Vancouver, Canada legal entity going forward.

> Its 60 % equity investment in Softbridge ­ Projectos Tecno­ On June 2, 2020, Volkswagen Financial Services AG ac­ lógicos S.A., Porto Salvo, Portugal quired all of the shares in the start­up business Voya GmbH, Hamburg, including its wholly owned subsid­ Effective March 6, 2020, Volkswagen Finance Luxemburg S.A., iary Voya Travel Technologies S.R.L., Bucharest, Romania, Strassen, Luxembourg, a wholly owned subsidiary of from a consortium of investors. Voya is one of the leading

Volkswagen AG, Wolfsburg, acquired a 44.44 % interest in providers of state­of­the­art business travel management. Mobility Trader Holding GmbH, Berlin, by way of a capital The acquisition broadens Volkswagen Financial Services increase. Mobility Trader Holding GmbH acts as the holding AG’s mobility offering for fleet customers to include busi­ company for the local companies of the heycar Group. ness travel management. On March 31, 2020, PayByPhone Technologies Inc., Van­ On June 18, 2020, as part of an asset deal, LogPay couver, Canada, an indirect wholly owned subsidiary of Transport Services GmbH, Eschborn, an indirectly wholly Volkswagen Financial Services AG, acquired all of the shares in owned subsidiary of Volkswagen Financial Services AG, ac­ Mathom AG, Düdingen, Switzerland. Mathom AG is one of the quired assets from Truckparking B.V., Utrecht, Netherlands, a leading providers of mobile payment solutions for parking in subsidiary of Volkswagen Financial Services AG in which the

Switzerland based on its SEPP Parking product. The company latter holds 79.11 % of the shares. has now been renamed PayByPhone Suisse AG. With this With effect from June 30, 2020, Mobility Trader Hold­ acquisition PayByPhone will expand its presence in the Swiss ing GmbH, Berlin, in which Volkswagen Financial Services AG

market to cover more than 70 cities, towns and municipalities. holds 44.44 % of the shares, founded Mobility Trader The Swiss market is a further element in PayByPhone’s strate­ Spain S.L., Barcelona, Spain. The shareholders of Mobility gy to become the leading provider of mobile payment solu­ Trader Spain S.L. are Mobility Trader Holding GmbH, Berlin,

tions for parking in Europe and North America. (shareholding of 75.1 %) and SEAT S.A., Martorell, Spain,

On March 31, 2020, the non­regulated finance lease, in­ (shareholding of 24.9 %). The aim of establishing this compa­ surance broking, services and dealer financing business activ­ ny is to support the expansion of the heycar used car plat­ ities of Volkswagen Bank GmbH, Ireland Branch, Dublin, form in the Spanish market. Ireland, were transferred to Volkswagen Financial Services On July 31, 2020, MAN Financial Services GmbH, Munich, Ireland Ltd., Dublin, Ireland, a wholly owned subsidiary of a wholly owned subsidiary of Volkswagen Financial Services Volkswagen Financial Services AG. AG, transferred all the shares in MAN Financial Services On April 2, 2020, Volkswagen Finance Overseas B.V., Am­ GesmbH, Eugendorf, Austria, to Volkswagen Financial sterdam, Netherlands, a wholly owned subsidiary of Services AG. This spin­off formed part of a reorganization in Volkswagen Financial Services AG, transferred all of the preparation for the merger of MAN Financial Services GmbH shares in sunhill technologies GmbH, Erlangen, to into Volkswagen Leasing GmbH, Braunschweig. PayByPhone Technologies Inc., Vancouver, Canada. On August 31, 2020, MAN Financial Services GmbH, Mu­ Effective May 28, 2020, Volkswagen Leasing GmbH, nich, was merged into Volkswagen Leasing GmbH, Braun­ Braunschweig, a wholly owned subsidiary of Volkswagen schweig. Both companies are wholly owned subsidiaries of Financial Services AG, transferred the entire portfolio of its Volkswagen Financial Services AG. The purpose of the merger branch in Warsaw, Poland, to the newly established was to consolidate the Truck & Bus business in Germany Volkswagen Leasing Polen GmbH, Braunschweig, a wholly under the umbrella of Volkswagen Leasing GmbH. owned subsidiary of Volkswagen Financial Services AG, by On September 1, 2020, Volkswagen Leasing GmbH, means of a spin­off. Braunschweig, a wholly owned subsidiary of Volkswagen On May 29, 2020, Volkswagen Leasing Polen GmbH was Financial Services AG, established the branch merged into Volkswagen Financial Services Polska Sp. z o.o., “MAN Financial Services, Zweigniederlassung der Volkswagen Warsaw, Poland, a wholly owned subsidiary of Volkswagen Leasing GmbH” in Munich.

Volkswagen Financial Services AG | Annual Report 2020 Combine d Management Report Fundamental Information about the Group 7

Likewise on September 1, 2020, Volkswagen Pon Financial Canada, to PayByPhone Technologies Inc., an indirectly whol­ Services B.V., Amersfoort, Netherlands, in which Volkswagen ly owned subsidiary of Volkswagen Financial Services AG. The

Financial Services AG holds an indirect 60 % equity invest­ transfer formed part of the internal restructuring of the ment, acquired the leasing portfolio of M. de Koning PayByPhone entities. Lease B.V., Krimpen aan den IJssel, Netherlands, by means of In the reporting year, Volkswagen Financial Services AG an asset deal. and its wholly owned subsidiary Volkswagen Finance Over­ Effective October 1, 2020, Volkswagen Financial Services seas B.V., Amsterdam, Netherlands, increased the equity of AG transferred the following equity investments to the following companies to strengthen their capital re­ Volkswagen Finance Overseas B.V., Amsterdam, Netherlands, sources: a wholly owned subsidiary of Volkswagen Financial Services AG, by means of a contribution in kind: > PayByPhone Technologies Inc., Vancouver, Canada, by €33.0 million

> Its 100 % equity investment in > sunhill technologies GmbH, Erlangen, by €19.5 million. MAN Financial Services GesmbH, Eugendorf, Austria,

> Its 100 % equity investment in There were no further significant capital increases. Volkswagen Financial Services Ireland Ltd., Dublin, Ireland These measures served to expand the business and sup­ port the shared growth strategy with the brands of the Effective October 7, 2020, LogPay Transport Services GmbH, Volkswagen Group. Eschborn, an indirectly wholly owned subsidiary of There were no other significant changes with respect to Volkswagen Financial Services AG, established LogPay equity investments. Detailed disclosures can be found in the Charge & Fuel Slovakia s.r.o., Bratislava, Slovakia. The share­ list of all shareholdings in accordance with section 313(2) of holders of LogPay Charge & Fuel Slovakia are LogPay the Handelsgesetzbuch (HGB – German Commercial Code)

Transport Services GmbH, Eschborn, (shareholding of 85 %) and in accordance with IFRS 12.10 and IFRS 12.21, which is and LogPay Financial Services GmbH, Eschborn, (sharehold­ included in the notes to the consolidated financial state­ ing of 15 %). The aim of establishing this company is the ments. expansion in the Slovakian market. The company shall com­ mence operating activities in 2021. SEPARATE NONFINANCIA L REPORT FOR THE GRO UP On October 31, 2020, VVS Assuradeuren B.V., Amersfoort, The summarized separate non­financial report of Netherlands, a wholly owned subsidiary of Volkswagen Pon Volkswagen AG and the Volkswagen Group in accordance Financial Services B.V., Amersfoort, Netherlands, was merged with sections 289 b and 315 b of the HGB for fiscal year 2020 into Volkswagen Pon Financial Services B.V., a subsidiary of will be available at https://www.volkswagenag.com/presence Volkswagen Finance Overseas B.V., Amsterdam, Netherlands, /nachhaltigkeit/documents/sustainability­report/2020/Non in which the latter holds 60 % of the shares. financial_Report_2020_d.pdf in German and at https:// On December 18, 2020, all of the shares in sunhill tech­ www.volkswagenag.com/presence/nachhaltigkeit/documents/s nologies Italy S.R.L., Ronco all‘ Adige, Italy, were transferred ustainability­report/2020/Nonfinancial_Report_2020_d.pdf in from sunhill technologies GmbH, Erlangen, a wholly owned English from April 30, 2021. subsidiary of PayByPhone Technologies Inc., Vancouver,

Volkswagen Financial Services AG | Annual Report 2020 8 Report on Economic Position Combined Management Report

Report on Economic Position

The global economy recorded negative growth in fiscal year 2020 due to the impact of the Covid­19 pandemic. Global demand for vehicles was lower than in the previous year. Volkswagen Financial Services AG’s operating result was at the level of the previous year.

GLOBAL SPREAD OF CORONAVIRUS (SARS­COV ­2 ) SPECIAL MANAGEMENT MEASURES IN RESPONSE TO THE COVID­ At the end of 2019, initial cases of a potentially fatal respir­ 19 PANDEMIC atory disease became known in Wuhan, in the Chinese Because of the Covid­19 pandemic, regular reports were gen­ province of Hubei. This disease is attributable to a novel erated in 2020 on new business, the credit risk situation, coronavirus. Infections also appeared outside China from realized residual values and payment deferrals. Particular mid­January 2020. In Europe, the number of people infect­ attention was paid to the risk and liquidity situation in the ed rose continuously in the course of February, and espe­ dealer organization. This reporting provided a detailed, time­ cially in March and April 2020. While many European ly overview of the risk situation in respect of the impact on countries recorded declining numbers of new infections as the financial performance of the Volkswagen Financial the second quarter of 2020 progressed, the rate of new Services AG Group, enabling the situation to be managed. infections continued to rise in North, Central and South In the second quarter, risk situation calculations were al­ America, Africa and parts of Asia. In the second quarter, so carried out for different ways in which the Covid­19 pan­ many of the measures taken to contain the Covid­19 pan­ demic could develop. demic were gradually eased, especially in Europe. This included partially lifting border controls and travel re­ OVERALL ASSESSMENT O F THE COURSE OF BUSI NESS AND THE strictions and easing lockdowns as well as the reopening of GROUP ’ S ECONOMIC POSITION businesses and public facilities. In addition, the European Despite the conditions in fiscal year 2020 described above, Commission and numerous European governments ap­ the operating result was at the level of the previous year. New proved aid packages to support the economy. In other business around the globe contracted as a consequence of the regions, too, governments introduced measures aimed at Covid­19 pandemic. Following a reorganization of the legal shoring up the economy to counteract the enormous dis­ entities in 2019, new contracts went up slightly compared ruption to everyday life and economic activity caused by with the prior­year figure. the Covid­19 pandemic. During the third quarter, and par­ Volkswagen Financial Services AG increased its business ticularly during the fourth quarter of 2020, many regions volume year­on­year, particularly in Germany. outside China around the world saw a renewed – and in The share of financed and leased vehicles in the Group’s

some cases very rapid – increase in new infections, which worldwide deliveries (penetration) stood at 27.6 (26.1) % at led to the easing of restrictions being reversed in certain the end of 2020, enabling Volkswagen Financial Services AG situations. to offset some of the contraction in deliveries. Throughout the whole of 2020, the global spread of the Funding costs were lower than the prior­year level, alt­ SARS­CoV­2 virus brought enormous disruption to all areas hough the volume of business was higher. of everyday life and the economy. The risk costs arising from credit and residual value risk were above the prior­year level in the reporting year, but margins remained stable.

Volkswagen Financial Services AG | Annual Report 2020 Combine d Management Report Report on Economic Position 9

The credit risk situation arising from Volkswagen Financial The funding structure remained well diversified in terms of Services AG’s overall portfolio was strongly shaped by the the instruments used. The Group’s main sources of fund­ Covid­19 pandemic in 2020. Specific measures were put in ing, comprising capital markets, ABSs, funding through place to avert and cushion the economic impact of the Covid­ banks and deposits in individual markets, continued to be 19 pandemic on customers. These measures included pay­ available at Group level and could still be used as required ment deferrals and support for the dealer organization in (albeit with considerable additional risk premiums in some collaboration with the Group brands. The international sub­ cases) despite the uncertainty arising from the Covid­19 sidiaries were granted a certain degree of latitude to develop pandemic, especially in the second quarter. The funding their own responses, as a result of which they designed tar­ situation significantly improved again during the second geted measures locally and adapted them in line with – or half of the year. occasionally over and above – specific legal requirements and The global, intercompany efficiency program referred to customer needs. The action taken mitigated potential effects as Operational Excellence (OPEX), which was launched in of the Covid­19 pandemic on Volkswagen Financial Services fiscal year 2017, is becoming even more important because of AG’s credit risk in 2020, with the result that there was only a the current situation (Covid­19 pandemic). moderate deterioration in the risk situation while the volume OPEX is focused on achieving further cost savings by of loans and receivables increased slightly. The current condi­ 2025 in addition to the requirements under current planning. tions mean that the provision for credit risks in the reporting The main components are initiatives to enhance produc­ year was higher than the prior­year figure. tivity (among other things by streamlining processes), opti­ The residual value portfolio expanded significantly in fis­ mization of distribution costs and the harmonization of IT cal year 2020. Despite the pandemic, there was only a mar­ systems through the global introduction of standardized ginal rise in residual value risk. Changes in residual value risk systems. continue to be closely monitored on an ongoing basis, lead­ Events after the balance sheet date are reported in the ing to corresponding measures where required. notes to the consolidated financial statements of Volkswagen At the level of the Volkswagen Financial Services AG Financial Services AG in note 73 (page 162). Group overall, liquidity risk remained stable. Because of the The Board of Management of Volkswagen Financial Covid­19 pandemic, markets could not be accessed temporar­ Services AG considers the course of business to have been ily or could only be accessed on a limited basis; in some cases, positive in 2020 despite the consequences of the Covid­19 significant premiums were required. pandemic.

CHANGES IN KEY PERFO RMANCE INDICATORS FO R FISCAL YEAR 2020 COMPARED WITH PRIOR­YEAR FORECASTS

Actual 2019 Forecast for 2020 Actual 2020

Nonfinancial performance indicators Penetration (percent) 26.1 > 26.1 Slightly above the previous year’s level 27.6 Current contracts (thousands) 14,813 > 14,813 Moderately above the prior­year level 15,409 New contracts (thousands) 5,655 > 5,655 Slightly above the previous year’s level 5,911

Financial performance indicators Volume of business (€ million) 88,852 > 88,852 Moderately above the prior­year level 92,572 Operating result (€ million) 1,223 = 1,223 At prior­year level 1,223 Return on equity (percent) 12.6 = 12.6 At prior­year level 8.4 Cost/income ratio (percent) 54 = 54 At prior­year level 57

DEVELOPMENTS IN THE GLOBAL ECONOMY period depended on the extent to which the negative impact The global spread of the SARS­CoV­2 virus, the associated re­ of the Covid­19 pandemic was already materializing The strictions, and the resulting downturn in demand and sup­ governments and central banks of numerous countries ply meant that growth in the world economy was negative in responded in some cases with substantial fiscal and mone­

2020, at –4.0 (2.6) %. The average rate of expansion of gross tary policy measures. This meant cuts in the already relative­ domestic product (GDP) was far below the previous year’s ly low interest rates. There was a significant drop in prices level in both the advanced economies and the emerging for energy resources, while other commodity prices in­ markets. At country level, performance in the reporting creased slightly year­on­year on average. On a global average,

Volkswagen Financial Services AG | Annual Report 2020 10 Report on Economic Position Combined Management Report

consumer prices rose at a slower pace than in 2019, and North America

global trade in goods declined in the reporting period. US economic output declined by –3.6 (2.2) % in the report­ ing year as rates of infection soared. To strengthen the Europe/Other Markets economy in light of the disruption caused by the Covid­19

At –7.2 (1.3) %, the economies of Western Europe as a whole, pandemic, the US government passed comprehensive stim­ recorded a sharp fall in growth in 2020. This trend was seen ulus packages. The US Federal Reserve cut interest rates in nearly all countries in Northern and Southern Europe. The twice, alongside other measures to support the economy. impact of national measures to contain the pandemic, in­ The weekly number of people filing new claims for unem­ cluding border closures and physical distancing, caused deep ployment benefits rose by several million before declining cuts. In some states, the measures severely restricted every­ but still remaining at a relatively high level. This was re­ day life and also had grave economic consequences. Gov­ flected accordingly in the unemployment rate, which more

ernments of many countries in this region subsequently than doubled year­on­year to 8.1 (3.7) % in the reporting

started to lift some of the restrictions imposed, spawning a period. GDP fell by –5.7 (1.9) % in neighboring Canada and

gradual economic recovery. Due to the renewed increase in by –9.0 (0.0) % in Mexico. case numbers in many countries as the year went on, several of these measures were tightened again, or at least left in South America

place. In addition, the uncertain outcome of the Brexit nego­ Brazil’s economy recorded a decline of –4.6 (1.4) % in 2020, tiations between the United Kingdom and the European resulting from the dynamic rate of infection caused by the

Union (EU) generated uncertainty in fiscal year 2020, as did Covid­19 pandemic. At –11.1 (–2.1) %, the economic downturn the related question of what form this relationship would in Argentina intensified amid continued high inflation and take in the future. substantial depreciation of the local currency compared with The economies in Central and Eastern Europe reported the previous year. a marked decline in the real absolute GDP in 2020 at –

3.7 (2.5) %, with economic output falling by –3.4 (2.9) % in Asia­Pacific

Central Europe and by –4.0 (2.0) % in Eastern Europe. The The Chinese economy, which had been exposed to the nega­ same trend was observed in Russia; economic output in tive effects of the Covid­19 pandemic earlier than other econ­ Eastern Europe’s largest economy contracted by omies and benefited from a relatively small number of new

–4.1 (1.3) %. infections as the year progressed, recorded positive growth Turkey was unable to sustain the recovery seen in the rates from the second quarter onwards, expanding by

first quarter, with GDP growth declining to 0.2 (1.0) % for 2.1 (6.1) % overall. Growth in India fell sharply to –8.9 (4.2) % 2020 as a whole but remaining in positive territory. South amid relatively high infection rates. Japan also recorded nega­

Africa’s GDP trend declined sharply in the reporting period tive growth of –5.4 (0.3) % compared with the same period of

to –7.3 (0.2) % amid persistent structural deficits and political the previous year owing to the negative impact of the Covid­ challenges. 19 pandemic.

Germany TRENDS IN THE MARKET S FOR FINANCIAL SERV ICES Germany’s economic output showed a significantly nega­ Automotive financial services were in high demand in 2020,

tive trend in the reporting year at –5.3 (0.6) %. The labor particularly in the first three months of the year. This was market was in a favorable situation at the start of the year, attributable to a number of factors, notably the persistently but the pandemic led many companies to introduce short­ low key interest rates in the main currency areas. Neverthe­ time working (Kurzarbeit) throughout the course of the less, the reporting period saw the Covid­19 pandemic exert year. The temporary easing of restrictions in everyday life downward pressure on the demand for financial services in and economic activity as well as government assistance virtually every region. The impact from the Covid­19 pan­ packages enacted to support the economy led to improved demic was noticeable around the globe, especially in the confidence among consumers and companies as the year second quarter of 2020. Markets for automotive financial progressed. However, it only occasionally matched the services staged a partial recovery in the third and fourth previous years’ levels. quarters.

Volkswagen Financial Services AG | Annual Report 2020 Combine d Management Report Report on Economic Position 11

The European passenger car market was affected by the Covid­ of weaker new car sales, with a related fall in demand for 19 pandemic especially in the second quarter of 2020, a down­ financing and leasing products. In India, demand for finan­ turn that unleashed a significant decline in demand in the cial services was below the previous year but rose again in the automotive business over the reporting period as a whole. In course of the year as lending rates in the new and used vehi­ these challenging market conditions, the proportion of vehi­ cle segments stabilized. cle sales accounted for by leases and financing agreements The Covid­19 pandemic also led to a substantial drop in continued to rise in European markets, even though the abso­ demand for new and used commercial vehicles in 2020. This lute figures for signed contracts fell short of the level achieved gave rise to an equivalent fall in the number of leases and in the previous year. The business with after­sales products financing agreements in Europe, although the penetration such as servicing, maintenance and spare parts agreements, as rates for financing products increased in Brazil. well as automotive­related insurance was maintained at the prior­year level in the current market environment. TRENDS IN THE MARKET S FOR PASSENGER CARS A N D L I GHT In Germany, the number of new vehicles financed by COMMERCIAL VEHICLES loans or leases in 2020 went down compared with the previ­ In fiscal year 2020, the global market volume of passenger cars ous year, reflecting the challenges presented by the Covid­19 fell significantly below the prior­year level due to the Covid­19 pandemic. In the leasing business with individual customers, pan­demic, decreasing to 67.7 million vehicles (–15.2 %). This the shift from financing to leases, which had begun in 2019, marked a decline for the third year in a row. All regions were continued in the reporting year. affected by this slump. The overall markets of Western Europe, In South Africa, the demand for financing and insurance South America and Africa recorded above­average losses, while products stabilized in the second half of 2020 following a the decline in Asia­Pacific and the Middle East was smaller in decline in the first six months of the year but remained be­ percentage terms. low the prior­year level for the reporting period overall. Low­ Global demand for light commercial vehicles in the re­ er interest rates led to an increase in cash purchases. Non­ porting period was down significantly on the previous year. vehicle loans were also used to buy vehicles. A drop in demand for new vehicles has been seen across Sector­Specific Environment the entire North America region as a consequence of the The sector­specific environment was influenced significantly Covid­19 pandemic. In the United States, however, demand by fiscal policy measures, which contributed considerably to for financial services rose slightly and increased as a propor­ the mixed trends in sales volumes in the markets last year. tion of vehicle sales. This included a noticeable shift from These measures included tax cuts or increases, incentive leases to financing agreements and an increase in used vehi­ programs and sales incentives, as well as import duties. cle business. The proportions accounted for by leases and In addition, non­tariff trade barriers to protect the respec­ financing agreements also went up year­on­year in Canada in tive domestic automotive industries made the movement of 2020, although the number of contracts declined in absolute vehicles, parts and components more difficult. terms because of the lower number of vehicles delivered. In Mexico, a downward trend was evident both proportionally Europe/Other Markets and in the absolute number of financing agreements. This In Western Europe, the number of new passenger car registra­ was attributable to a number of factors, including the current tions in the reporting period was down substantially by as restricted level of fleet business. much as –24.5 % on the prior­year figure, at 10.9 million. The In South America, demand for vehicles and automotive negative impact from the spread of the SARS­CoV­2 virus was financial services in the reporting year was down on the noticeable in all countries in the region as early as March. previous year. It recovered at the end of 2020 after dipping in After the drastic decline at the beginning of the second quar­ the second and third quarters as a consequence of the pan­ ter, recovery set in the months that followed, and by the end demic. In Brazil, the trend toward fleet business and long­ of the third quarter, figures even matched those of the prior term leases continued to strengthen, with the number of year. The fourth quarter of 2020 witnessed a lateral move­ long­term lease contracts exceeding the prior­year level. In a ment in the market, keeping volumes noticeably below the difficult macroeconomic environment, customers in Argen­ previous year’s level. New registrations saw declines on a tina purchased their vehicles mostly in cash; demand for similar scale in all major individual markets and were in automotive financial services decreased year­on­year. negative territory at year­end: France (–25.4 %), Italy (–27.9 %),

In China, the passenger car market began its recovery the UK (–29.4 %) and Spain (–32.1 %). from the Covid­19 pandemic in the second quarter of 2020. The volume of new registrations of light commercial ve­ The easing of the restrictions led to a steady rise in contracts hicles in Western Europe fell significantly below the prior­ for automotive financial services, which reached a slightly year figure, essentially due to the pandemic. higher level than in the previous year overall. In Japan, the In the Central and Eastern Europe region, the market vol­ effects of the Covid­19 pandemic were perceptible in the form ume of passenger cars in fiscal year 2020 was down 15.9 % on

Volkswagen Financial Services AG | Annual Report 2020 12 Report on Economic Position Combined Management Report

the prior­year level at 2.8 million vehicles. Following the light commercial vehicles (–11.9 %) such as SUVs and pickup slump in the second quarter and the recovery in the third models. In the Canadian automotive market, the Covid­19 quarter, the volume of new vehicle registrations flatlined in pandemic significantly accelerated the downward trend that

the fourth quarter and was moderately short of the previous began in 2018 (–19.7 %). In Mexico, sales of passenger cars and

year’s figure. The development of demand in the reporting light commercial vehicles declined sharply (–28.0 %), falling period differed from market to market. In Central Europe, the short of the prior­year figure for the fourth year in a row.

number of new registrations dropped substantially by 23.3 % to 1.1 million units. By contrast, the decline in sales of pas­ South America

senger cars in Eastern Europe (–10.1 %) was weaker, due in In the markets of the South America region, the volume of

particular to demand in Russia slowing less sharply (–8.8 %). new registrations for passenger cars and light commercial

Registration volumes for light commercial vehicles in Central vehicles in 2020 was much lower (–28.1 %) at 3.1 million and Eastern Europe were down significantly year­on­year. In units following the drastic decline in the second quarter, a Russia, the number of vehicles sold in the reporting period strong recovery in the third quarter and a lateral move­ was also significantly lower than in the previous year. ment in the fourth quarter, though falling short of the At 0.6 million units, the volume of the passenger car mar­ levels recorded in the previous year. The South America

ket in Turkey in the reporting period was up by over 50 % on region saw the most severe negative impact of the Covid­19 the very low prior­year level. The increase in demand was pandemic on the automotive markets in terms of percent­ boosted in particular by the strong growth in the third quarter age. In Brazil, the recovery in vehicle demand that began in of 2020. In South Africa, the pandemic meant that the number 2017 was interrupted in the reporting year; at 2.0 million

of new passenger car registrations was down sharply on the vehicles (–26.7 %), the number of new registrations was

comparatively poor results of the previous year (–30.4 %). sharply lower than in the prior­year period. Exports of vehicles manufactured in Brazil continued to decline, fall­

Germany ing by –24.3 % to 324 thousand. In the Argentinian market, New passenger car registrations in Germany in fiscal year too, the spread of the SARS­CoV­2 virus negatively impact­ 2020 fell significantly short of the previous year’s high level, ed the demand for passenger cars and light commercial

declining to 2.9 million units (–19.1 %). Exacerbated by the vehicles. In 2020, there was sharp 26.6 % fall in sales to Covid­19 pandemic and its fallout, demand for passenger cars 0.3 million units. fell to its lowest level since German reunification despite a temporary reduction in value­added tax and higher purchase Asia­Pacific premiums for electric vehicles. In the Asia­Pacific region, too, the reporting period was ad­ Owing to the mandated temporary shutdowns driven by versely impacted by the spread of the SARS­CoV­2 virus. After the pandemic and weak demand in important foreign mar­ the very sharp decline in the first three months, the rapid kets, domestic production and exports in the reporting peri­ rebound in the second quarter and a return to prior­year od again fell short of the comparable prior­year figures: pas­ levels in the third quarter, demand in the last quarter of 2020

senger car production decreased by –24.6 % to 3.5 million was moderately up on the previous year. The market volume

vehicles, largely due to the –24.1 % drop in passenger car of passenger cars was noticeably lower than the prior­year

exports to 2.6 million units. level at 30.9 million units (–9.6 %). This was also partly due to Demand for light commercial vehicles in Germany in the developments in the Chinese passenger car market, where the reporting period was significantly lower than in 2019. volume of demand fell distinctly short of the previous year to

19.9 million units (–6.5 %) as a result of the Covid­19 pandem­ North America ic. Following the severe losses in the first three months of At 17.1 million vehicles, sales of passenger cars and light com­ 2020, there were clear signs of a recovery in the overall mar­ mercial vehicles (up to 6.35 tonnes) in North America in fiscal ket there as the year went on. In India, sales of passenger cars

year 2020 were down significantly on the prior­year figure (– dwindled significantly year­on­year, falling by –17.3 % to

15.9 %). The negative effects of the Covid­19 pandemic were 2.3 million units. In the Japanese passenger car market, vehi­ also very noticeable in this region. After a drastic decline in cle demand in the reporting period of 3.8 million units (–

demand at the beginning of the second quarter and a steady 11.2 %) was down markedly on the previous year due not only recovery in the months that followed, until the prior­year level to the Covid­19 pandemic, but also to the increase in VAT as was reached in September, the region witnessed volatile mar­ of October 1, 2019. ket performance in the last quarter of 2020. In December, a There was a significant year­on­year decline in demand for new recovery set in and the previous year’s figure was exceed­ light commercial vehicles in the Asia­Pacific region. Registration ed. The market volume in the USA remained markedly lower volumes in China, the region’s dominant market and the largest

than the 2019 level, falling to 14.6 million units (–14.5 %). The market worldwide, fell distinctly year­on­year. The number of

decline affected both the passenger car segment (–28.3 %) and

Volkswagen Financial Services AG | Annual Report 2020 Combine d Management Report Report on Economic Position 13

new vehicle registrations was significantly below the previous The previously anticipated downturn in the market for 2020 year’s level in Japan and drastically lower in India. was amplified by the Covid­19 pandemic, especially in the sec­ ond quarter of the year. The Russian market also deteriorated TRENDS IN THE MARKET S FOR COMMERCIAL VEH I C L E S noticeably as a consequence of the Covid­19 pandemic and the In the markets that are relevant for the Volkswagen Group, related economic fallout. Turkey saw new registrations more global demand for mid­sized and heavy trucks with a gross than double compared to an admittedly very low prior­year weight of more than six tonnes was down substantially year­ figure. By contrast, the South African market declined consider­ on­year in fiscal year 2020 due to the spread of the SARS­CoV­ ably. In Brazil, the largest market in the South America region,

2 virus: 459 thousand new vehicles were registered (–24.7 %). demand for trucks was significantly below the level seen in the Despite the ongoing uncertainty generated by the Covid­19 previous year as a result of the pandemic. pandemic, a recovery could be seen in almost all of the mar­ Demand for buses in the markets that are relevant for the kets that are relevant for the Volkswagen Group in the second Volkswagen Group was much lower than in the previous year half of 2020 compared with the first six months. as a consequence of the pandemic. All key markets within the

In the 27 EU states excluding Malta, but plus the United EU27+ 3 contributed to this trend, with the market for coach­

Kingdom, Norway and Switzerland (EU27+ 3), the number of es in particular virtually grinding to a halt. Demand was very new truck registrations was sharply down on the prior­year much lower in Brazil and was less than half the prior­year figure, dropping –30.1 % to a total of 263 thousand vehicles. level in Mexico. Registrations in Germany, the largest market in this region, fell substantially year­on­year.

GLOBAL DELIVERIES TO CUSTOMERS OF THE VOLKSWAGEN GROUP 1

DELIVERIES OF VEHICLES 2020 2019 Change in percent

Deliveries of passenger cars worldwide 9,115,185 10,733,077 –15.1 Volkswagen Passenger Cars 5,328,029 6,279,007 –15.1 Audi 1,692,773 1,845,573 –8.3 ŠKODA 1,004,816 1,242,767 –19.1 SEAT 427,035 574,078 –25.6

Bentley 11,206 11,006 + 1.8 Lamborghini 7,430 8,205 –9.4 Porsche 272,162 280,800 –3.1 Bugatti 77 82 –6.1 Volkswagen Commercial Vehicles 371,657 491,559 –24.4 Deliveries of commercial vehicles worldwide 190,187 242,220 –21.5 Scania 72,085 99,457 –27.5 MAN 118,102 142,763 –17.3

1 The delivery figures of the previous year have been updated or restated following statistical updates and changes to the reporting structure. Including Chinese joint ventures.

FINANCIAL PERFORMANC E €498 (324) million included in this figure were attributable to The global economy recorded negative growth in 2020 as a current market fluctuations and expectations. consequence of the Covid­19 pandemic. The performance of Interest expenses were down year­on­year at €1,286 million

Volkswagen Financial Services AG was nevertheless stable. (–4.9 %). The operating result remained at the prior­year level, Net income from service contracts amounted to amounting to €1,223 (1,223) million. €454 (190) million and was significantly above the prior­year

Profit before tax came to €1,038 (1,264) million, which figure. was significantly below the prior­year level. Net income from insurance business amounting to

Return on equity amounted to 8.4 (12.6) %. €155 (155) million remained on the previous year’s level. Interest income from lending transactions and marketable The provision for credit risks of €600 (294) million was securities was below the prior­year level at €1,995 million significantly higher than in the previous year. Credit risks to

(–4.7 %). which the Volkswagen Financial Services AG Group is ex­ Net income from leasing transactions amounted to posed as a result of various critical situations (Brexit, eco­

€2,006 (1,917) million and was therefore higher than in the nomic crises) in the United Kingdom, Russia, Brazil, Mexico, previous year. The impairment losses on lease assets of India and the Republic of Korea were accounted for in the

Volkswagen Financial Services AG | Annual Report 2020 14 Report on Economic Position Combined Management Report

reporting period by recognizing valuation allowances. These The vehicle insurance business saw a stable level of new busi­ valuation allowances were decreased by €47 million year­on­ ness in 2020 in spite of the conditions caused by the Covid­19 year to €581 million, largely as a consequence of the change pandemic. Volkswagen Autoversicherung AG now holds a port­ in business volume. folio of 461 thousand vehicle insurance policies, which is higher Net fee and commission income amounted to than the prior­year figure. In addition to the new business, the €89 (156) million, which was significantly below the prior­ migration of the legacy portfolio of Volkswagen­ year level. This decrease was attributable to a number of Versicherungsdienst GmbH to Volkswagen Autoversicherung factors, most notably the higher expenses for business ex­ AG (previously with Allianz AG) contributed to the portfolio pansion in China. growth compared with 2019 (422 thousand vehicle insurance General and administrative expenses were up on the pre­ policies). vious year at €2,071 (2,006) million. This figure also includes In 2020, Volkswagen Versicherung AG was operating pri­ costs associated with services for other entities in the mary and reinsurance business in 14 international markets, Volkswagen Group. Accordingly, costs of €469 (464) million complementing the core business in Germany. were passed on to other entities in the Volkswagen Group and Volkswagen­Versicherungsdienst GmbH, which operates reported under net other operating income/expenses. At as the sales partner in the German market for both

57 (54) %, the cost/income ratio was worse than in the previ­ Volkswagen Autoversicherung AG and Volkswagen ous year. Versicherung AG, has contributed to the successful perfor­

At €521 million (+ 8.1 %), the figure for net other operat­ mance of these companies. Overall, the activities of ing income/expenses exceeded the prior­year level. An Volkswagen­Versicherungsdienst GmbH help to support the amount of €52 (86) million was added to the provisions for earnings of Volkswagen Financial Services AG on a steady legal risks and recognized through profit or loss in net other basis. operating income/expenses. The share of profits and losses of equity­accounted joint ventures declined moderately year­ NET ASSETS AND FINANCIAL POSITION on­year to €64 (65) million. Lending Business In the reporting year, the net gain/loss on miscellaneous At €106.0 billion in total, loans to and receivables from cus­ financial assets amounting to a net loss of €168 (14) million tomers and lease assets – which make up the core business of included impairment losses of €81 million for non­ the Volkswagen Financial Services AG Group – accounted for

consolidated subsidiaries and €70 million for equity­ approximately 90 % of the Group’s total assets. accounted joint ventures. On the basis of these figures, to­ The volume of retail financing lending rose by

gether with the other income and expense components, the €0.3 billion to €21.0 billion (+ 1.4 %). Volkswagen Financial Services AG Group generated a profit The number of new retail financing contracts came to

from continuing operations, net of tax, of €806 million 1,256 thousand, which was below the prior­year level

(–9.4 %). (1,268 thousand). The number of current contracts stood at Under Volkswagen Financial Services AG’s current control 2,959 thousand at the end of the year. and profit­and­loss transfer agreement, a loss of €673 million The lending volume in dealer financing – which compris­ reported by Volkswagen Financial Services AG in its single­ es loans to and receivables from Group dealers in connection entity financial statements prepared in accordance with the with financing for inventory vehicles, as well as working HGB was absorbed by the sole shareholder Volkswagen AG. capital and investment loans – declined to €4.3 billion

The German companies continued to account for the (–21.1 %).

highest business volumes with 31.4 % of all contracts. Receivables from leasing transactions amounted to

Despite the tough conditions, Volkswagen Leasing GmbH €40.0 billion (+ 0.1 %), which was at the level of the previous expanded its portfolio of leases slightly compared with the year. previous year. The operating result was significantly above Lease assets recorded growth of €4.5 billion to

the prior­year level. €27.3 billion (+ 19.9 %).

Volkswagen Financial Services AG | Annual Report 2020 Combine d Management Report Report on Economic Position 15

A total of 1,346 thousand new leases were entered into in the Deposit Business and Borrowings reporting period. The contract portfolio of lease vehicles as of In terms of capital structure, the significant liability items December 31, 2020 was 3,539 thousand. As in the previous included liabilities to banks in the amount of €14.7 billion 1 year (1,632 thousand), the largest contribution again came (+ 1.4 %), liabilities to customers amounting to €20.2 billion from Volkswagen Leasing GmbH, which had a contract port­ (+ 28.4 %) and notes, commercial paper issued of €62.0 billion folio for 1,631 thousand lease vehicles (–0.0 %). (+ 1.7 %). Further details on the funding and hedging strategy Total assets of the Volkswagen Financial Services can be found in the management report in the sections Li­

AG Group rose to €117.8 billion year on year (+ 4.8 %). This quidity Analysis (page 17) and Funding (pages 17 – 18) and in increase was mainly attributable to the growth in lease assets, the risk report within the disclosures on interest­rate risk reflecting the expansion in business in the reporting year. (page 27) and liquidity risk (page 28). The number of service and insurance contracts at the year­end was 8,912 thousand. The new business volume of Subordinated Capital

3,309 thousand contracts was up on the prior­year figure The subordinated capital decreased by 28.7 % year­on­year to (3,087 thousand). €3.5 billion.

Equity The subscribed capital of Volkswagen Financial Services AG remained unchanged at €441 million in fiscal year 2020. Equity in accordance with IFRSs was €12.8 (12.0) billion. This

resulted in an equity ratio of 10.8 % (equity divided by total assets) based on total assets of €117.8 billion.

Changes in Off­Balance­Sheet Liabilities Off­balance­sheet liabilities increased by a total of €48 mil­ lion year­on­year to €860 million as of December 31, 2020.

1 Prior­year figure adjusted following the merger of MAN Financial Services GmbH, Munich, into Volkswagen Leasing GmbH.

Volkswagen Financial Services AG | Annual Report 2020 16 Report on Economic Position Combined Management Report

KEY FIGURES BY SEGME NT AS OF DECEMBER 31 , 2 0 2 0

United Other VW FS AG in thousands Germany Kingdom Sweden China Brazil Mexico companies1 Group

Current contracts 4,833 1,873 657 1,316 602 638 5,491 15,409 Retail financing – 8 84 1,311 403 207 944 2,959 of which: consolidated – 8 84 1,311 403 207 530 2,544 Leasing business 1,561 974 150 5 13 58 777 3,539 of which: consolidated 1,561 974 150 – 1 58 553 3,297 Service/insurance 3,272 891 422 – 186 372 3,769 8,912 of which: consolidated 3,272 848 230 – 111 372 2,193 7,026 New contracts 1,755 817 247 637 260 184 2,011 5,911 Retail financing – 14 29 636 159 53 364 1,256 of which: consolidated – 14 29 636 159 53 217 1,109 Leasing business 669 327 64 1 3 25 258 1,346 of which: consolidated 669 327 64 – 0 25 179 1,264 Service/insurance 1,087 476 153 – 98 106 1,389 3,309 of which: consolidated 1,087 453 85 – 72 106 779 2,582

€ million Loans to and receivables from customers attributable to Retail financing – 196 1,016 9,397 2,591 1,097 6,710 21,006 Dealer financing 9 1 226 905 262 419 2,449 4,272 Leasing business 18,869 15,263 1,250 1 9 426 4,166 39,984 Lease assets 17,682 2,892 1,804 0 1 101 4,831 27,311 Investment2 8,593 1,317 545 – – 1 2,404 12,860 Operating result 225 334 62 161 104 107 230 1,223

Percent Penetration3 55.1 49.3 59.3 16.0 33.9 49.2 26.4 27.6 of which: consolidated 55.1 49.3 59.3 15.8 33.2 49.2 17.3 25.4

1 The Other Companies segment covers the following markets: Australia, Belgium, the Czech Republic, France, India, Ireland, Italy, Japan, Korea, Luxembourg, Poland, Portugal, Russia and Spain. Relating to the number of contracts and penetration, it also covers the following markets: Argentina, the Netherlands, Norway, Switzerland, South Africa, Taiwan and Turkey. It also includes the Volkswagen Financial Services AG holding company, the holding and financing companies in Belgium and the Netherlands, the EURO­Leasing companies in Denmark and Germany, Volkswagen Insurance Brokers GmbH, Volkswagen Versicherung AG, Volim Volkswagen Immobilien Vermietgesellschaft für VW­/Audi­Händlerbetriebe mbH and consolidation effects. 2 Corresponds to additions to lease assets classified as noncurrent assets. 3 Ratio of new contracts for new Group vehicles under retail financing and leasing business to deliveries of Group vehicles

DEVELOPMENT OF NEW CONTRACTS AND CURRENT CONTRACTS AS OF DECEMBER 31 in thousands

Current contracts as of December 31 Of which new contracts in the reporting period

2,959 1,256 Retail financing 2020 3,539 1,346 < Leasing 8,912 3,309 Service/insurance

2,915 1,268 Retail financing 2019 3,359 1,300 < Leasing 8,539 3,087 Service/insurance

Volkswagen Financial Services AG | Annual Report 2020 Combine d Management Report Report on Economic Position 17

Liquidity Analysis must be covered with an adequate liquidity buffer over a time The companies of Volkswagen Financial Services AG are horizon of seven and thirty days. From a regulatory perspec­ funded primarily through capital market and ABS (asset­ tive, there was no immediate need to take action for backed securities) programs. Committed and uncommitted Volkswagen Leasing GmbH in the reporting year. credit facilities with external banks and with companies of the Volkswagen AG Group are also available to protect against FUNDING unexpected fluctuations in the liquidity position. The utiliza­ Strategic Principles tion of credit lines is generally intended. The committed In terms of funding, Volkswagen Financial Services AG gener­ credit facility with Volkswagen AG serves solely as a liquidity ally pursues a strategy of diversification with the aim of backup; its utilization is not intended in the normal course of achieving the best possible balance of cost and risk. This business. means accessing the widest possible variety of funding To ensure there is appropriate liquidity management, sources in the various regions and countries with the objec­ Treasury prepares liquidity maturity balances, carries out tive of safeguarding funding on a long­term basis at opti­ cash flow forecasts and takes action as required. In these mum terms. calculations, the legally determined cash flows are assumed for funding instruments, whereas estimated cash flows are Implementation used for other factors that affect liquidity. Volkswagen Financial Services AG and its subsidiaries issued The internal control system (ICS) at Volkswagen Financial a number of bonds in different currencies during the year Services AG is used to measure liquidity risk individually for under review. In addition to euro bonds, bonds denominated significant companies. The liquidity risk is managed using a in pound sterling, Swedish krona, Norwegian krone and Japa­ maturity structure for Treasury liabilities. This approach nese yen were issued under Volkswagen Financial Services includes a limit system covering the subsequent 12 months. AG’s debt issuance program. Bonds based on local documen­ The limits are reviewed each month in a process that acts as tation requirements were also issued in Brazil. In addition, an early warning indicator. Reports are submitted centrally asset­backed securities (ABSs) were successfully placed. on a quarterly basis. A Group limit for Volkswagen Financial Volkswagen Financial Services AG was active in global Services AG is also determined and managed appropriately; markets with various ABS transactions; along with the issu­

67.3 % of this limit was utilized as of December 31, 2020. ance of bonds in euros, securities were also issued in China Various subsidiaries of Volkswagen Financial Services AG and Japan. must fulfill different regulatory liquidity requirements at The issuance of commercial paper and the use of bank local level. For example, Volkswagen Leasing GmbH has to credit lines together with borrower’s note loans completed satisfy the “Mindestanforderungen an das Risikomanage­ the funding mix. ment” (MaRisk – German Minimum Requirements for Risk The Company continued to implement its strategy of Management). Compliance with these requirements is de­ mainly obtaining maturity­matched funding by borrowing termined and continuously monitored by the liquidity risk on terms with matching maturities and by using derivatives. management department. Additionally, the cash flows for the A currency­matched funding approach was taken by borrow­ coming 12 months are projected and compared against the ing liquidity in local currency, and currency risks were elimi­ potential funding available in each maturity bucket. nated by using derivatives. There is a strict regulatory requirement that any liquidity requirements identified in institution­specific stress scenarios

Volkswagen Financial Services AG | Annual Report 2020 18 Report on Economic Position Combined Management Report

The following tables show the transaction details:

CAPITAL MARKET 2020

Issuer Month Country Volume and currency Maturity

Volkswagen Financial Services N.V., Amsterdam January Sweden SEK 1.5 billion 2 and 3 years Volkswagen Financial Services N.V., Amsterdam February United Kingdom GBP 400 million 4.1 years Volkswagen Financial Services Japan Ltd., Tokyo February Japan JPY 3 billion 3 years Volkswagen Financial Services AG, Braunschweig April Germany EUR 2.15 billion 3, 5 and 8 years Volkswagen Financial Services N.V., Amsterdam April United Kingdom GBP 350 million 5.6 years Volkswagen Financial Services N.V., Amsterdam April Norway NOK 800 million 3 years Volkswagen Financial Services N.V., Amsterdam September Sweden SEK 750 million 2 years Volkswagen Financial Services AG, Braunschweig September Germany EUR 700 million 1 year Volkswagen Financial Services N.V., Amsterdam September United Kingdom GBP 500 million 3 years Volkswagen Leasing GmbH, Braunschweig November Germany EUR 500 million 2 years Volkswagen Financial Services N.V., Amsterdam November Sweden SEK 250 million 2 years Banco Volkswagen S.A., São Paulo Full year Brazil BRL 1.3 billion 1 to 3 years

A BS 2 0 2 0

Issuer Transaction name Month Country Volume and currency

Volkswagen Financial Services Japan Ltd., Tokyo Driver Japan nine February Japan JPY 64.2 billion Volkswagen Leasing GmbH, Braunschweig VCL 30 March Germany EUR 1.0 billion Volkswagen Finance China Co., Ltd., Beijing Driver China ten March China CNY 6.0 billion Volkswagen Leasing GmbH, Braunschweig VCL 31 November Germany EUR 1.1 billion Volkswagen Finance China Co., Ltd., Beijing Driver China eleven November China CNY 8.0 billion

Ratings In March 2020, S&P confirmed its short­term and long­term Volkswagen Financial Services AG is a wholly owned subsidi­ ratings for Volkswagen Financial Services AG at A­2 and BBB+ ary of Volkswagen AG and, as such, its credit ratings with respectively. At the same time, following an identical rating both Moody’s Investors Service (Moody’s) and Stand­ action taken for Volkswagen AG, the outlook was lowered to ard & Poor’s Global Ratings (S&P) are closely associated with negative. In March 2020, Moody’s announced that it would be those of the Volkswagen Group. Following the transfer of carrying out a review of the long­term A3 corporate rating to Volkswagen Bank GmbH to become a direct subsidiary of establish whether a downgrade was required because of the Volkswagen AG in 2017, this association between ratings has Covid­19 pandemic. Moody’s concluded the review in become even closer. June 2020 and confirmed the A3 long­term rating but revised the outlook to negative.

Volkswagen Financial Services AG | Annual Report 2020 Combined Management Report Volkswagen Financial Services AG 19

Volkswagen Financial Services AG

(Condensed, in accordance with the HGB)

BUSINESS PERFORMANCE 2 0 2 0 The increase in provisions of €51 million (9.4 %) arose mainly Volkswagen Financial Services AG reported a result from from higher provisions for pensions. ordinary activities after tax amounting to a loss of Bonds rose year­on­year by €1,350 million to €9,700 million,

€673 million for fiscal year 2020. an increase of 16.2 %. Sales revenue amounted to €603 (612) million, with cost Liabilities to banks in connection with borrower’s note

of sales coming to €596 (606) million. These items include loans rose by €75 million or 4.2 % to €1,873 million. Liabili­ the income from cost allocations to Group companies and ties to affiliated companies went up by €3,503 million

the expenses related to personnel and administrative costs. (52.4 %), largely as a result of new fixed­rate loans and time Other operating income came to €17 (8) million, with other deposits from Volkswagen AG and fixed­rate loans from operating expenses amounting to €24 (17) million. Other oper­ Volkswagen International Luxemburg S.A..

ating income included income from the reversal of provisions The equity ratio was 13.5 (16.8) %. Total assets at the end amounting to €13 million. Other operating expenses included of the reporting period amounted to €27,756 million. issue and rating costs of €6 million. Net investment income declined by €74 million to a net NUMBER OF EMPLOYEES expense of €78 (–4) million. This decrease resulted primarily Volkswagen Financial Services AG had a total of 5,311 (previ­ from the net loss of €100 (net profit of 28) million at ous year: 5,275) employees as of December 31, 2020. Employ­

VTI GmbH. ee turnover was less than 1.0 %. The loss after tax of €673 million will be absorbed by The employees of Volkswagen Financial Services AG also Volkswagen AG pursuant to the existing control and profit­ work for the subsidiaries because of the structure of the Ger­ and­loss transfer agreement. man legal entities in the Volkswagen Financial Services

Long­term financial assets rose by 14.3 % to AG Group. At the close of 2020, 1,017 (previous year: 798) €10,311 million. The change resulted from the increase of employees were leased to Volkswagen Leasing GmbH. In €857 million in loans to affiliated companies, of €110 million addition, 173 (previous year: 170) employees were leased to in loans to other investees or investors and of €402 million in Volkswagen Insurance Brokers GmbH, 80 (previous year: 82) other loans. Some of the increase was offset by a decline of employees to Volkswagen Versicherung AG, 9 (previous year: €35 million in shares in affiliated companies and of 10) employees to Volkswagen Autoversicherung AG, 0 (previ­ €46 million in equity investments. Write­downs of ous year: 161) employees to MAN Financial Services GmbH, 2 €147 million and reversals of write­downs amounting to (previous year: 0) employees to Volkswagen Bank GmbH and €39 million were recognized in respect of shares in affiliated 2,651 (previous year: 2,713) employees to Volkswagen companies and equity investments. Financial Services Digital Solutions GmbH. The changes in Receivables from affiliated companies rose by relation to Volkswagen Leasing GmbH were largely attributa­

€3,634 million (44.0 %). This increase was primarily attributa­ ble to the merger of MAN Financial Services GmbH into ble to loans. Loans to and receivables from other investees or Volkswagen Leasing GmbH.

investors increased by €348 million (6.8 %) and were mainly Volkswagen Financial Services AG employed 131 (previ­ attributable to loans and time deposits. ous year: 131) vocational trainees as of December 31, 2020.

Volkswagen Financial Services AG | Annual Report 2020 20 Volkswagen Financial Services AG Combined Management Report

MANAGEMENT, AND OPPO RTUNITIES AND RISKS RELATING TO Financial Services AG as a legal entity are observed using THE BUSINESS PERFORM A N C E O F VOLKSWAGEN FINANCIA L key performance indicators such as net assets, net income SERVICES AG and liquidity. This internal management concept and these Volkswagen Financial Services AG operates almost exclu­ opportunities and risks are described in the section on the sively as a holding company and is integrated into the fundamental information about the Volkswagen Financial internal management concept of the Volkswagen Financial Services Group (pages 4 and 5) as well as in the report on Services Group. It is thus subject to the same key perfor­ opportunities and risks (pages 22–30) of this annual report. mance indicators and the same opportunities and risks as the Volkswagen Financial Services Group. The legal re­ quirements governing the management of Volkswagen

Volkswagen Financial Services AG | Annual Report 2020 Combined Management Report Volkswagen Financial Services AG 21

INCOME STATEMENT OF VOLKSWAGEN FINANCIAL SERVICES AG, BRAUNSCHWEIG, FOR FISCAL YEAR 2020

€ million 2020 2019

Sales 603 612 Cost of sales –596 –606 Gross profit on sales 7 6 General and administrative expenses –195 –200 Other operating income 17 8 Other operating expenses –24 –17 Net income from long­term equity investments –78 –4 of which income under profit and loss transfer agreements 169 231 of which expenses from absorption of losses –248 –236 Financial result –198 –75 of which income from affiliated companies 98 53 of which expenses from affiliated companies –108 –19 Income tax expense –201 13 Profit after tax –673 –270 Profits transferred under a profit­and­loss transfer agreement – – Losses absorbed under a profit­and­loss transfer agreement 673 268 Net income – – Profit brought forward 2 2 Amount withdrawn from capital reserves 0 0 Net retained profits 2 2

BALANCE SHEET OF VOLKSWAGEN FINANCIAL SERVICES AG, BRAUNSCHWEIG, AS O F DECEMBER 31, 2020

€ million Dec. 31, 2020 Dec. 31, 2019

Assets A. Fixed assets I. Financial assets 10,311 9,023 10,311 9,023 B. Current assets I. Receivables and other assets 17,425 13,401 II. Cash­in­hand and bank balances 1 1 17,426 13,402 C. Prepaid expenses 19 15 Total assets 27,756 22,440

Equity and liabilities A. Equity I. Subscribed capital 441 441 II. Capital reserves 3,216 3,216 III. Retained earnings 100 100 IV. Net retained profits 2 2 3,759 3,759 B. Provisions 599 547 C. Liabilities 23,398 18,127 D. Deferred income 0 7 Total equity and liabilities 27,756 22,440

Volkswagen Financial Services AG | Annual Report 2020 22 Report on Opportunities and Risks Combined Management Report

Report on Opportunities and Risks The active management of opportunities and risks is a fundamental element of the success­ ful business model used by Volkswagen Financial Services AG.

OPPORTUNITIES AND RI SKS that developing innovative products that are tailored to cus­ In this section, the opportunities and risks that arise in connec­ tomers’ changing mobility requirements offers additional tion with business activities are presented across all segments. opportunities. Growth areas such as mobility products and The opportunities and risks are grouped into various catego­ service offerings are being systematically developed and ries. Unless specifically stated, there were no material year­on­ expanded. Further opportunities may be created by launch­ year changes to the individual risks or opportunities. ing established products in new markets. Analyses of the competitive and operating environment Volkswagen Financial Services AG expects to be present­ are used, together with market observations, to identify not ed with opportunities arising from the digitalization of its only risks but also opportunities, which then have a positive business. The aim is to ensure that all key products are also impact on the design of products, the success of the products available online around the world, thereby enabling the in the marketplace and on the cost structure. Opportunities Company to enhance efficiency. By expanding digital sales and risks that are expected to materialize have already been channels, Volkswagen Financial Services AG is promoting taken into account in the medium­term planning and forecast. direct sales and facilitating the extension of the used vehicle The following sections therefore describe fundamental oppor­ financing platform. In this way, changing customer needs tunities that could lead to a positive variance from the forecast are addressed and the competitive position of Volkswagen and the risk report presents a detailed description of the risks. Financial Services AG reinforced. However, the digitalization of the business model also involves strategic risk, for exam­ Macroeconomic Opportunities and Risks ple from the potential emergence of new competitors. The Board of Management of Volkswagen Financial Services AG anticipates that deliveries to Volkswagen Group custom­ Opportunities from Credit Risk ers will be significantly up on the previous year in 2021 – Opportunities may arise in connection with credit risk if the assuming successful containment of the Covid­19 pandemic losses actually incurred on lending transactions or in the – amid continued challenging market conditions. Volkswagen lease business turn out to be lower than the prior calculations Financial Services AG supports this positive trend by provid­ of expected loss and the associated provisions recognized on ing financial services products designed to promote sales. the basis thereof. A situation in which the incurred losses are Overall, growth in the global economy depends on how the lower than the expected losses can occur particularly in indi­ Covid­19 pandemic develops. However, diminished rates of vidual countries where economic uncertainty dictates a con­ global economic growth or a period of below­average growth servative risk approach but the economic circumstances then rates cannot be ruled out. In this regard, particular attention stabilize, resulting in an improvement in the credit quality of needs to be paid to the expiry of government support measures the borrowers concerned. and the economic consequences of the action implemented to contain the pandemic. The macroeconomic environment could Opportunities from Residual Value Risk also give rise to opportunities for Volkswagen Financial Services When vehicles are remarketed, Volkswagen Financial Services AG if actual trends turn out to be better than the forecast. AG may be presented with the opportunity to achieve a price that is higher than the calculated residual value if increasing Strategic Opportunities and Risks demand pushes up market values more than expected. In addition to maintaining its international focus by tapping into new markets, Volkswagen Financial Services AG believes

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KEY FEATURES OF THE INTERNAL CONTROL SYSTEM AND THE > The Internal Audit department is a key component of the INTERNAL RISK MANAGE MENT SYSTEM AS REGAR DS THE FINAN­ monitoring and control system. It carries out regular audits CIAL REPORTING PROCESS of accounting­related processes in Germany and abroad as The internal control system (ICS) that is relevant to the ac­ part of its risk­oriented auditing activities and reports on counting system and used for the consolidated and annual these audits directly to the Board of Management of financial statements, is the sum of all principles, procedures Volkswagen Financial Services AG. and activities aimed at ensuring the effectiveness, efficiency and propriety of the financial reporting and the compliance In summary, the existing internal monitoring and control with the relevant legal requirements. The internal risk man­ system of the Volkswagen Financial Services AG Group is agement system (IRMS) as regards the accounting process intended to ensure that the financial position of the individ­ refers to the risk of misstatement in the bookkeeping at the ual entities and of the Volkswagen Financial Services Company and Group level as well as in external financial AG Group as of the reporting date December 31, 2020 has reporting. The sections below describe the key elements of been based on information that is reliable and has been the ICS/IRMS as they relate to the financial reporting process properly recognized. No material changes were made to the of Volkswagen Financial Services AG. internal monitoring and control system of Volkswagen Financial Services AG after the reporting date. > The Board of Management of Volkswagen Financial Services AG is the governing body with responsibility for ORGANIZATIONAL STRUCTURE OF THE RISK MANAGEMENT SYSTEM the executive management of the business. In this role, the At Volkswagen Financial Services AG, risk is defined as the Board has set up Accounting, Treasury Controlling, ICS danger of loss or damage that could occur if an expected Steering, Compliance & Integrity (ICS Steering) and Con­ future development turns out to be less favorable than trolling units, each with clearly separated functions and planned. Volkswagen Financial Services AG, including its clearly assigned areas of responsibility and authority, to subsidiaries and equity investments, is exposed to a large ensure that accounting and financial reporting processes number of risks typical for the financial services sector as are carried out properly. part of its primary operating activities. It accepts risks in a > Group­wide rules and accounting requirements have been responsible manner so that it can exploit any resulting mar­ put in place to ensure a standardized, proper and continu­ ket opportunities. ous financial reporting process for all domestic and foreign An internal control system based on a three­lines­of­ entities included in the consolidated financial statements defense model has been implemented to manage risks in the in accordance with the International Financial Reporting Volkswagen Financial Services AG Group. This structure func­ Standards. What companies are included in the consolida­ tions as a monitoring and control system for risk. The system tion has been defined along with a mandatory requirement comprises a framework of risk principles, organizational to use a standardized, comprehensive set of forms for structures and processes for assessing and monitoring risks. mapping and processing intragroup transactions. The individual elements are tightly focused on the activities > Analyses and any adjustments to single­entity financial of the individual divisions. This structure makes it possible to statements prepared by the consolidated entities are com­ identify at an early stage any trends that could represent a plemented by the reports submitted at Group level by the risk to the business as a going concern so that appropriate auditor, taking into account specific control activities corrective action can then be initiated. aimed at ensuring that the consolidated financial reporting Appropriate procedures are in place to ensure the ade­ provides a true and fair view. The clear definition of areas quacy of the risk management. Firstly, the relevant risk owner of responsibility accompanied by various monitoring and for individual types of risk continuously monitors and man­ review mechanisms ensures that all transactions are accu­ ages risks, which are pooled by the ICS Steering unit and rately recognized in the accounts, processed and evaluated, reported to the Board of Management. Secondly, the individ­ and then properly reported. ual elements in the system are regularly verified on a risk­ > These monitoring and review mechanisms are designed oriented basis by Internal Audit and by external auditors as with both integrated and independent process compo­ part of the audit of the annual financial statements. nents. For example, automated IT processing controls ac­ The Chairman of the Board is responsible for risk moni­ count for a significant proportion of the integrated process toring and credit analysis within Volkswagen Financial activities alongside manual process controls, such as dou­ Services AG. In this role, the Chairman of the Board submits ble­checking by a second person. These controls are sup­ regular reports to the Supervisory Board and Board of Man­ plemented with specific Group­level functions at the par­ agement on the overall risk position of Volkswagen Financial ent company Volkswagen AG, for example the Group Tax Services AG. department. An important feature of the risk management system at Volkswagen Financial Services AG is the clear, unequivocal

Volkswagen Financial Services AG | Annual Report 2020 24 Report on Opportunities and Risks Combined Management Report

separation of tasks and areas of responsibility, both organiza­ PRODUCT TRANSPARENCY AND NEW MARKETS PRO CESS tionally and in terms of personnel, between the holding Before launching new financial­services products or com­ company (ICS Steering unit) and the markets (local risk man­ mencing activities in new markets, Volkswagen Financial agement) to ensure that the system is fully functioning at all Services AG carries out processes – with the involvement of times and regardless of the personnel involved. departments such as Controlling and Reporting – to ensure One of the functions of the ICS Steering unit is to provide that the Company is aware of the requirements and effects framework constraints for the organization of the risk man­ relating to the new product or market concerned and that an agement system. This function includes drawing up and informed decision can then be made on this basis at an ap­ coordinating risk policy guidelines (to be carried out by the propriate level of organizational authority. risk owner), developing and maintaining methodologies and processes relevant to risk management as well as issuing RISK CONCENTRATIONS internal framework standards for the procedures to be used Volkswagen Financial Services AG is a captive financial ser­ around the world. vices provider in the automotive sector. The business model, ICS Steering is a neutral, independent unit that reports di­ which focuses on promoting vehicle sales for the different rectly to the Chairman of the Board of Management of Volkswagen Group brands, results in concentrations of risk, Volkswagen Financial Services AG. Local risk management which can take various forms. ensures that the requirements applicable to the international Concentrations of risk can arise from an uneven distribu­ subsidiaries are implemented and complied with. The on­site tion of activity in which local risk management is responsible for the detailed design of models and procedures for measuring and managing risks, > Just a few borrowers/contracts account for a large propor­ and carries out local implementation of processes and tech­ tion of the loans (counterparty concentrations) nical features. > A small number of sectors account for a large proportion of the loans (sector concentrations) BUSINESS STRATEGY AN D RISK MANAGEMENT > Many of the loans are to businesses within a defined geo­ Fundamental decisions relating to strategy and the instru­ graphical area (regional concentrations) ments of risk management are the responsibility of the Board > Loans/receivables are secured by just one type of collateral of Management. As part of this overall responsibility, the or by a limited range of collateral types (collateral concen­ Board of Management has introduced a strategy process and trations) drawn up a business strategy. The ROUTE2025 business strat­ > Residual values subject to risk are limited to a small num­ egy sets out the fundamental views of the Board of Manage­ ber of vehicle segments or models (residual value concen­ ment of Volkswagen Financial Services AG on key matters trations), or relating to business policy. It includes the objectives for each > Volkswagen Financial Services AG’s income is generated major business activity and the strategic areas for action to from just a few sources (income concentrations). achieve the relevant objectives. The main risk management goals and measures for each One of the objectives of Volkswagen Financial Services AG’s category of risk provide direction for the business policy risk policy is to reduce such concentrations by means of and risk appetite. The attainment of goals is reviewed annu­ broad diversification. ally and any variances are analyzed to establish the caus­ Counterparty concentrations from customer financing es.The focus of the risk strategy, which is adopted and are only of minor significance because of the large propor­ communicated by the Board of Management and applies tion of business accounted for retail lending. In terms of throughout the Group, is based on risk appetite and the regional distribution, the Company aims for broadly based management requirements for each risk category and risk diversification of business across regions. process. The risk appetite and management requirements In contrast, sector concentrations in the dealership busi­ are defined on a regular basis for all categories of risk that ness are a natural part of the business for a captive and these have been deemed material by the Board of Management. concentrations are therefore individually analyzed. Risk appetite and management requirements have an im­ Likewise, a captive cannot avoid collateral concentrations pact on the extent to which risk management measures are because the vehicle is the predominant collateral asset by implemented by the risk owner for the individual risk cate­ virtue of the business model. A broad vehicle diversification gories. Further details and specifics for the individual risk also means that there is no residual value concentration. categories are set out in operational requirements as part of Income concentration arises from the very nature of the the planning round in accordance with management re­ business model. The special constellation in which the Com­ quirements. pany serves to promote Volkswagen Group sales results in certain dependencies that directly affect income growth.

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MATERIAL RISK CATEGO RIES AND RISK REPORT ING nomic downturn leads to a higher number of insolvencies or A risk survey has identified the following risk categories as greater unwillingness of borrowers or lessees to make pay­ material to Volkswagen Financial Services AG: credit risk, ments, the recognition of a higher write­down expense is country risk, shareholder risk, interest rate risk, residual value required. This in turn has an adverse effect on the operating risk, liquidity risk, earnings risk, risks of insurance compa­ result. nies, operational risk, reputational risk, compliance and In the reporting year, there was only a modest increase in integrity risk, and strategic risk. credit risk based on a slight rise in the volume of loans and Risks are regularly reported to the Board of Management receivables. Alongside statutory assistance, internal support in the form of a management report. This includes key finan­ measures implemented by the Group mitigated effects from cial performance indicators and key risk data for selected the Covid­19 pandemic. substantial risk categories. The presentation of aggregated Lending or credit decisions at Volkswagen Financial quantitative data for the Volkswagen Financial Services Services AG are made primarily on the basis of the borrower AG Group is accompanied by a presentation of the changes credit check. In the local entities, these credit checks use by market. rating or scoring systems, which provide the relevant de­ Ad hoc reports at risk­category level are generated as partments with an objective basis for reaching a decision on a needed to supplement the system of regular reporting. These loan or a lease. reports are used to ensure that the Board of Management is A set of procedural instructions outlines the require­ informed of any impending negative trends. ments for developing and maintaining the local rating sys­ tems. Similarly, golden rules specify the parameters for de­ OVERVIEW OF RISK CAT EGORIES veloping, using and validating the scoring systems in the retail business.

Financial risks Nonfinancial risks Rating systems for corporate customers Volkswagen Financial Services AG uses rating systems to Credit risk Operational risk assess the credit worthiness of corporate customers. This Country risk Reputational risk evaluation takes into account both quantitative factors Shareholder risk Compliance and integrity risks (mainly data from annual financial statements) and qualita­ Interest rate risk Strategic risk tive factors (such as the prospects for future business growth, Residual value risk quality of management, market and industry environment, Liquidity risk and the customer’s payment record). When the credit as­ Earnings risk sessment has been completed, the customer is assigned to a Risks of insurance companies rating class, which is linked to a probability of default. A centrally maintained, workflow­based rating application is

FINANCIAL RISKS used for the most part to support this analysis of credit wor­ Credit Risk thiness. The rating determined for the customer serves as an Credit risk is defined as the danger of incurring losses as a important basis for decisions on whether to grant or renew a result of defaults in customer business, specifically the de­ loan and for decisions on provisions. The models in use are fault of the borrower or lessee. Loans to and receivables from largely centrally validated and monitored on a regular basis, Volkswagen Group companies are also included in the analy­ and are adjusted and refined as required. sis. The default is caused by the borrower’s or lessee’s insol­ vency or unwillingness to pay. This includes a situation in Scoring systems in the retail business which the counterparty does not make interest payments or For the purposes of determining the credit quality of retail repayments of principal on time or does not pay the full customers, scoring systems are incorporated into the pro­ amounts. cesses for credit approval and for evaluating the existing The aim of systematic credit risk monitoring by the in­ portfolio. These scoring systems provide an objective basis ternational subsidiaries is to identify potential borrower or for credit decisions. The systems use information about the lessee insolvencies at an early stage, initiate any corrective borrower available internally and externally and estimate the action to prevent a potential default in good time and antici­ probability of default for the requested loan, generally with pate possible losses by recognizing appropriate write­downs the help of statistical methods based on historical data cover­ or provisions. Significant borrowers or borrower units are ing a number of years. An alternative approach adopted for also monitored by ICS Steering. smaller or low­risk portfolios also uses generic, robust score­ If a loan default materializes, this represents the loss of a cards and expert systems to assess the risk involved in credit business asset, which has a negative impact on financial applications. To classify the risk in the credit portfolio, both position and financial performance. If, for example, an eco­ behavioral scorecards and straightforward estimation proce­

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dures at risk pool level are used, depending on portfolio size CHANGES IN CREDIT RI SK and the risk inherent in the portfolio. The models and sys­ tems in use are regularly monitored, validated, adjusted (where required) and refined at local level. Credit risk1 Dec. 31, 2020 Dec. 31, 2019

Collateral Amount utilized (€ million) 103,263 100,962 The general rule is that credit transactions are secured by Default rate in % 1.8 1.6 collateral to an extent that is commensurate with the risk. In Impairment ratio in % 2.0 1.8 addition, overarching rules specify the requirements that must be satisfied by collateral, the evaluation procedures and 1 Including joint ventures (full inclusion) and subsidiaries recognized at cost. the evaluation bases. Local collateral guidelines with specific The rating and scoring processes on which the impairment values take these rules into account. The values in the collat­ ratio is based include default probabilities of future events. As eral policies are based on historical data and experience ac­ of the reporting date, the provisions exceed the actual losses cumulated by experts over many years. As the operating incurred. activities of Volkswagen Financial Services AG are focused on retail financing, dealer financing and the leasing of vehicles, Country Risk the vehicles themselves are hugely important as collateral Country risk refers to risks in international transactions that assets. For this reason, trends in the market values of vehicles are not attributable to the counterparty itself but that arise are locally monitored and analyzed; the collateral values because of the counterparty’s domicile in a country outside based on this data are adjusted, where required. Germany. For example, political or economic trends caused by a crisis or difficulties affecting the entire financial system Provisions in the country concerned may mean that cross­border ser­ The calculation of provisions is based on the expected loss vices involving the movement of capital cannot be carried model in accordance with IFRS 9 and is also derived from out because of transfer problems attributable to action im­ the results of the rating and scoring processes. plemented by the foreign government in question. Country With regard to impaired loans and receivables, a dis­ risk would need to be taken into particular account when in tinction is also made between significant and insignificant connection with funding and equity investment activities loans and receivables. Specific provisions are recognized involving foreign companies and with the lending and leas­ for significant impaired loans and receivables, whereas ing business operated by the local companies. Given the specific provisions evaluated on a group basis are recog­ focus of business activities in the Group, there is little chance nized for insignificant impaired loans and receivables. that country risk (such as foreign exchange risks or legal Portfolio (global) provisions are recognized to cover im­ risks) will arise. In addition, the causes of country risk are paired loans or receivables for which no specific provisions inevitably reflected in the other direct and indirect risk cate­ have been recognized. gories involved (e.g. credit risk). ICS Steering sets fundamental parameters in the form of Volkswagen Financial Services AG does not generally have golden rules and guidelines for the management of credit any significant cross­border loans to borrowers outside the risk. These constraints form the mandatory outer framework basis of consolidation. The conventional country risk analysis of the central risk management system, within which the is not applicable to intercompany lending because, if the divisions/markets can operate in terms of their business difficulties described above were to occur, the funding of the policy activities, planning, decisions, etc. in compliance with Group entities through lending could be extended if neces­ their assigned authority. Appropriate processes are used to sary, thereby ensuring that the entities could continue to monitor all lending in relation to financial circumstances, operate in the strategic market concerned. collateral and compliance with limits, contractual obligations In 2020, the Brexit negotiations in the United Kingdom and internal and external conditions. To this end, exposures did not have any impact on the risk situation of Volkswagen are transferred to a suitable form of supervision or support Financial Services AG. Nevertheless, the risk situation con­ depending on risk content (normal, intensified or problem tinues to be closely monitored so that the Company can loan). Credit risk is also managed using reporting limits de­ respond proactively to any emerging developments. Various termined by Volkswagen Financial Services AG and specified scenarios were analyzed in 2020 in connection with the separately for each individual company in accordance with approach of Brexit, allowing the Company to be prepared for the support strategy for the international subsidiaries. Regu­ all eventualities. lar reporting and the yearly planning process are used to monitor credit risk at portfolio level.

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Shareholder Risk lower than the residual value calculated at the inception of Shareholder risk refers to the risk that equity investments the lease. On the other hand, there is an opportunity in that made by Volkswagen Financial Services AG could potentially the remarketing could generate proceeds greater than the lead to losses in connection with capital provided (as a result calculated residual value. of lack of dividends, write­downs to going­concern value, A distinction is made between direct and indirect residual losses on disposal or decrease in hidden reserves), profit­and­ value risk in relation to the bearer of this risk. Direct residual loss transfer agreements (loss absorption) or liability risks value risk refers to residual value risk borne directly by (for example, in the case of letters of comfort). Volkswagen Financial Services AG (contractually determined). In principle, Volkswagen Financial Services AG only An indirect residual value risk arises if the residual value risk makes such equity investments to help it achieve its corpo­ has been transferred to a third party (such as a dealer) on the rate objectives. basis of a residual value guarantee. In such cases, the initial risk The investments must therefore support its own oper­ is a counterparty default risk in respect of the residual value ating activities and are intended to be held on a long­term guarantor. If the residual value guarantor defaults, the residual basis. If shareholder risk were to materialize in the form of value risk reverts to Volkswagen Financial Services AG. a loss of fair value or even the complete loss of an equity If a residual value risk materializes, it may be necessary to investment, this would have a direct impact on relevant recognize an impairment loss or a loss on disposal of the financial data. The net assets and financial performance of asset concerned. This could have a negative impact on finan­ Volkswagen Financial Services AG would be adversely af­ cial performance. As stated in the accounting policies for fected by write­downs recognized in profit or loss. leases described in the notes to the consolidated financial Equity investments are integrated into the annual strate­ statements, the impairment losses generally lead to a subse­ gy and planning process of Volkswagen Financial Services AG. quent adjustment of future depreciation rates. It exercises influence over the business and risk policies of Direct residual value risk is quantified using expected the equity investments through its representation on the loss, which equates to the difference between the latest fore­ relevant ownership or supervisory bodies. However, respon­ cast as of the remeasurement date of the remarketing pro­ sibility for the operational use of the risk management tools ceeds on expiration of the contract and the contractual re­ lies with the business units themselves. sidual value specified for each vehicle. Other parameters such as remarketing costs are also taken into account in the calcu­ Interest Rate Risk lation. The expected loss for the portfolio is determined by Interest rate risk refers to potential losses that could arise as a aggregating the individual expected losses for all vehicles. result of changes in market interest rates. It occurs because of The expected losses arising from contracts subject to risk interest rate mismatches between asset and liability items in a relate to the losses expected at the end of the term of the portfolio or on the balance sheet. Volkswagen Financial contracts concerned. These losses are recognized in profit or Services AG is exposed to interest rate risk in its banking book. loss in the consolidated financial statements for the current Changes in interest rates that cause interest rate risk to mate­ period or in prior periods. The ratio of the expected losses rialize can have a negative impact on financial performance. from contracts subject to risk to the contractually fixed re­ Interest rate risk is managed on the basis of limits using inter­ sidual values in the overall portfolio is expressed as a risk est rate derivatives as part of the risk strategy defined by the exposure. The results from the quantification of the expected Board of Management of Volkswagen Financial Services AG. loss and risk exposure are considered in the assessment of Monitoring is performed by Treasury on the basis of a service the risk situation. agreement with Volkswagen Bank GmbH. A report on interest In the case of indirect residual value risk, the risk arising rate risk at Volkswagen Financial Services AG is submitted to in connection with determining residual value is generally the Board of Management each quarter. As of December 31, quantified using a methodology similar to that applied for

2020, 81.2 % of the limit was utilized. direct residual value risk, but the methodology also takes into account further risk parameters (dealer default and other Residual Value Risk factors specific to this risk category). Residual value risk arises from the fact that the actual market value for a lease asset at the time of remarketing could be

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CHANGES IN DIRECT RE SIDUAL VALUE RISK tion and the range of liquidity coverage. It decides on funding measures and prepares any necessary decisions for the deci­ sion­makers. ICS Steering communicates the main risk man­ Direct residual value risk1 Dec. 31, 2020 Dec. 31, 2019 agement information and relevant early warning indicators

relating to liquidity risk. As of December 31, 2020, 67.3 % of Number of contracts 2,430,832 2,134,455 the limit was utilized. Guaranteed residual values (€ million) 32,713 27,678 Risk exposure in % 4.1 3.9 Earnings Risk Earnings risk refers to the risk that actual figures will vary 1 Including joint ventures (full inclusion) and subsidiaries recognized at cost from the budgeted income statement earnings in the man­ As part of the management of residual value risk, Volkswagen agement strategy for the Volkswagen Financial Services Financial Services AG has firstly specified rules for managing AG Group. It is derived from any variance in the actual in­ residual value. The processes for this include the calculation come (negative variance) and actual expenses (positive vari­ of the risk exposures of forward­looking residual value fore­ ance) in comparison with the budgeted figures. casts. Secondly, it has established uniform requirements for The risk is largely determined by the business strategy the Group, which reflect the accounting standards governing and internal business planning as well as by changes in gen­ the recognition of provisions for risks. On the basis of this eral operating parameters (such as the level of sales in the mandatory outer framework, the division/markets monitor Volkswagen Group, business volume, technical processes, and control their business policy activities, planning, deci­ competitive environment). sions, etc. in compliance with their assigned authority. Regu­ Earnings risk is quantified on the basis of the anticipated lar reporting, business financial reviews and the yearly plan­ deviation of the operating result from the budget. To this end, ning process are used to monitor residual value risk at the trends in actual figures compared with forecasts are mon­ portfolio level. itored at market level during the course of the year. This Despite the pandemic, there was only a marginal increase comparison is included in the standard reporting procedure in this risk in the reporting year. carried out by Controlling.

Liquidity Risk Risks of Insurance Companies Liquidity risk is the risk of a negative variance between actual The mission of the insurance companies in the Volkswagen and expected cash inflows and outflows. Liquidity risk is Financial Services AG Group is to support sales of the defined as the risk of not being able to meet payment obliga­ Volkswagen Group’s products. This is achieved in a number of tions in full or when due, or – in the event of a liquidity crisis ways, but mainly by offering guarantee insurance as a prima­ – the risk of only being able to raise funding at higher market ry insurer and inward reinsurance. rates or only being able to sell assets at a discount to market Underwriting risk is one of the key types of risks for in­ prices. If liquidity risk were to materialize, higher costs and surance companies. Within Volkswagen Financial Services lower selling prices for assets could lead to a negative impact AG, this risk arises in the subsidiaries Volkswagen on financial performance. The consequence of liquidity risk Versicherung AG, Volkswagen Insurance Company DAC and in the worst­case scenario is insolvency caused by illiquidity. Volkswagen Reinsurance Company DAC. It arises if the cash Liquidity risk management ensures that this situation does flows that are material to the insurance company differ from not arise. The analysis and management of liquidity risk at their expected value. One source of this risk is the uncertain­ the entities belonging to Volkswagen Financial Services AG ty as to whether the total amount of actual payments for are outsourced to the Treasury unit of Volkswagen Bank claims matches the total amount of expected payments for GmbH. claims. A key feature of the risk position faced by insurance The primary objective of liquidity management is to safe­ companies is that premiums are collected at the beginning of guard the ability of the Company to meet its payment obliga­ an insurance period but the associated contracted benefits tions at all times. This can be guaranteed through the use of are of a random nature. Depending on the insurance business drawdowns under credit facilities available with third­party operated by the company concerned, underwriting risk can banks and with Volkswagen AG. To measure liquidity risk, be subdivided in accordance with regulatory requirements Volkswagen Financial Services AG has set up a system of into the risks associated with three different classes of insur­ limits throughout the Group. This system restricts funding­ ance: non­life underwriting risk, life underwriting risk and related cash outflows over a time horizon of 12 months. A health underwriting risk. broad diversification of funding maturities is therefore nec­ The purpose of managing underwriting risk is not to avert essary to ensure compliance with the limits. To manage li­ such risk in its entirety but to manage the risk systematically in quidity, the Operational Liquidity Committee (OLC) meets at accordance with the objectives. In principle, risks are not ac­ least every four weeks to monitor the current liquidity situa­ cepted unless they can be calculated and borne by the company.

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If claims are excessive relative to the premium calculation, negative impact on financial position and financial perfor­ the risk situation of the portfolio must be reviewed. mance, depending on the amount of the loss. Processes and The materiality of non­life, life and health underwriting responsibilities are set out in the operational risk manual. risks is assessed through a qualitative evaluation of the risks The annual risk self­assessment is used to determine a based on the magnitude of the potential loss and the associ­ forward­looking monetary assessment of potential risks. A ated probability that the risks will materialize. The risks are standardized risk questionnaire is provided for this purpose. quantified using the standard formula specified in Solvency The local experts use these questionnaires to determine and II. The risks are managed by the independent risk control record the potential level of risk and the probability that a function in each insurance company. The results are then risk could materialize. The central loss database is used to reported to the relevant units. ensure that information about monetary operational losses The management of risk at the insurance companies in­ is collected internally on an ongoing basis and the relevant cludes, in addition to underwriting risk, other risks that are data is stored. A standardized loss form is made available to not subsumed under the risk categories described above and the local experts to aid this process. The experts use this form below because of partially differing regulatory definitions. to determine and record the relevant data, including the Depending on the insurance business involved, these risks amount and cause of the loss. may include the following: Operational risk is managed by the companies/divisions (operational risk units) on the basis of the guidelines in force > Counterparty default risk and the requirements laid down by the special operational > Market risk risk units responsible for specific risk categories. To this end, > Inflation risk local management decides whether future risks or losses are > Operational risk to be ruled out (risk prevention), mitigated (risk mitigation), > Liquidity risk consciously accepted (risk acceptance) or transferred to third > Miscellaneous non­quantifiable risks parties (risk transfer). The ICS Steering unit checks the plausibility of the infor­ The risks of insurance companies in the Volkswagen Financial mation provided by the companies/divisions in the risk self­ Services AG Group therefore reflect the entire risk profile of assessments, reviews the reported loss events and then initi­ the insurance companies and allow the risks to be managed ates any necessary corrective action, reviews the operational using a dedicated system appropriate to the business mission. risk system to ensure it is fully functioning and instigates appropriate modifications as required. This includes the NONFINANCIAL RISKS integration of all relevant operational risk units. Operational Risk Details of operational risk are reported regularly as part Operational risk (OpR) is defined as the risk of loss that could of the financial analysis report to the Board of Manage­ result from inadequate or failed internal processes (process ment. Ad hoc reports are issued in addition to the ongoing risk), people (HR risk), systems (technological risk), projects reports, provided that the relevant specified criteria are (project risk), legal positions or contracts (legal risk), or from satisfied. external events (catastrophe risk). The actual losses incurred as a result of operational risks The objective of operational risk management is to pre­ amounted to €38.8 (43.7) million as of December 31, 2020, of sent operational risks transparently and initiate precaution­ which €5.6 million was attributable to additional costs aris­ ary and corrective measures with a view to preventing or, ing from the pandemic. These costs were mainly incurred in when this is not possible, mitigating the risks or losses. If an connection with implementing social distancing and hygiene operational risk materializes, this represents an operational measures, deploying more security personnel and canceling loss with the resulting loss of a business asset, which has a planned events and business trips.

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Reputational Risk sonal conviction. This is carried out mainly by stipulating Reputational risk refers to the risk that an event or several binding requirements at Group level. In turn, these then successive events could cause reputational damage (in the provide a framework for specifying detailed requirements for eyes of the general public), which in turn could limit current which local compliance & integrity officers are responsible. and future business opportunities or activities (potential Local companies are independently responsible for imple­ earnings), thereby leading to an indirect adverse financial menting the centrally defined requirements. Responsibility impact (customer base, sales, funding costs) and direct finan­ for complying with any further rules and ethical principles cial losses such as penalties, litigation costs, etc. The respon­ lies with the company concerned. sibilities of the Corporate Communications unit include Overall, the emergence of a compliance and integrity cul­ avoiding negative reports in the press or similar announce­ ture is being nurtured by constantly promoting the ments that could inflict damage on the reputation of the Volkswagen Group’s Code of Conduct and by raising employ­ Company. If this is unsuccessful, the unit is then responsible ees’ risk­oriented awareness. The main instruments used to for assessing the situation and initiating appropriate com­ foster this culture are a tone­from­the­top approach, class­ munications aimed at specific target groups to limit the room training, and e­learning programs. The compliance and reputational damage as far as possible. The strategic objective integrity culture is also being consolidated by communica­ is therefore to prevent or reduce any negative variance be­ tion measures, including the distribution of guidelines and tween actual reputation and the level of reputation the Com­ other information media as well as employee participation in pany expects. A loss of reputation or damage to the Compa­ compliance and integrity programs. ny’s image could have a direct impact on financial The Chief Compliance & Integrity Officer supports and performance. advises the Board of Management in matters relating to the avoidance of compliance and integrity risks and reports to Compliance and Integrity Risks the Board at regular intervals. The Board of Management has At Volkswagen Financial Services AG, compliance risk refers also entered into a voluntary undertaking regarding compli­ to risks that could arise from non­compliance with statutory ance and integrity. This ensures that compliance and integri­ rules and regulations or internal requirements. ty aspects will also be discussed and taken into account in all Separately, integrity risk encompasses all risks that arise decisions made by the Board of Management. from a failure of employees to conduct themselves in an ethically acceptable manner or act in accordance with the Strategic Risk Group’s principles or the values of Volkswagen Financial Strategic risk (also referred to as the risk from general busi­ Services, thereby presenting an obstacle to the long­term ness activities) is the risk of a direct or indirect loss arising success of the business. Such risk can also result from inade­ from strategic decisions that are flawed or based on false quate conduct by the Company toward the customer, unrea­ assumptions. Strategic risk also includes all risks that result sonable treatment of the customer or provision of advice from the integration/reorganization of technical systems, where products that are not suitable for the customer are personnel or corporate culture (integration/reorganization used. risk). These risks may be caused by fundamental decisions To counter these risks, the Compliance and Integrity func­ about the structure of the business made by the management tion is committed to ensuring compliance with laws, other in relation to the positioning of the Company in the market. legal requirements, internal rules and self­proclaimed values, The objective of Volkswagen Financial Services AG is to and to creating and fostering an appropriate compliance and manage its acceptance of strategic risk enabling it to system­ integrity culture. atically leverage earnings potential in its core business. In the The role of the Chief Compliance & Integrity Officer with­ worst­case scenario, a materialization of strategic risk could in the Compliance and Integrity function is to work toward jeopardize the continued existence of the Company as a go­ implementing effective procedures to ensure compliance ing concern. with legal rules and requirements, and toward establishing appropriate controls. This officer is also responsible for oper­ SUMMARY ating an integrity management system with the aim of rais­ In 2020, the risks were moderately greater than in the previ­ ing awareness of the ethical principles and code of conduct ous year. In fiscal year 2020, which was mainly shaped by the and helping employees to choose the right course of action in pandemic, the levels of credit and residual value risk, in par­ a responsible and resolute manner, based on their own per­ ticular, were slightly higher than in the previous year.

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Human Resources Report

HR modernization – focus on the customer

EMPLOYEES customer service provided by top employees and still fur­ The Volkswagen Financial Services AG Group had a total ther improving its excellent globally recognized reputation workforce of 10,880 (10,773) employees as of December 31, as a top employer.

2020. Of these, 5,789 (5,763), or 53 %, were employed in Ger­ Responsibility for implementing the employee strategy many and 5,091 (5,010), or 47 %, at international sites. Owing at an international level lies with the international subsidi­ to economic considerations, 270 (336) employees of aries themselves, supported by the international HR unit at Volkswagen Servicios, S.A. de C.V., Puebla, Mexico, which is an the head office in Braunschweig. The Human Resources unconsolidated company, are included in the overall work­ Strategy Card remains the most important management force figures. tool for implementing the HR strategy. The objectives and definitions set out in the tool provide local companies with EMPLOYEES BY REGION a uniform basis to be applied around the globe. The local as of December 31, 2020 entities hold regular meetings with the head office in Braunschweig – at least once a year – to report on their progress and share detailed information on this. Depending on the situation, support measures are agreed and/or excel­ lent examples from other branches are presented and dis­ Germany cussed in regional workshops and at the annual HR confer­ Europe ence so that synergies can also be leveraged between the Asia­Pacific different local companies. 5% 2% Latin America 11 % North America The HR unit was fundamentally restructured in the re­ porting year. Until now, administrative tasks have account­

53 % ed for a high proportion of HR activities. Going forward, 29 % HR will be expected to be more proactive in influencing corporate strategy. The requirement is for an innovative partner capable of providing the impetus for the continued strategic development of various topics. At the same time,

the focus is on supporting employees and providing advice for managers. A further requirement from now on is for HR HUMAN RESOURCES STRATEGY to provide advisory expertise rather than an administrative The ROUTE2025 strategy has created new areas of focus in service. terms of HR strategy. Five strategic areas of activity are The HR unit has clearly oriented itself around customer listed under the heading “Top Employer/Top Employees”. needs with a structure based on a business partner model. These areas of activity are helping Volkswagen Financial The provision of strategic advice for managers on HR issues Services AG to position itself as “The Key to Mobility”. The has been taken over by the customer function, whereas the objective is to attract, develop and retain the best employ­ new employee service center now looks after all employee­ ees. With the support of these employees, the Company will related matters. The two functions are backed by a broad drive forward development around the other strategic cor­ range of specialist expertise in other components of the nerstones of customers, volume, profitability and opera­ structure, enabling all matters to be treated on a holistic and tional excellence. Through the use of specific activities to long­term basis. The aim is thus to ensure that HR supports develop and retain personnel, coupled with performance­ all customers efficiently and effectively and that it is involved based profit sharing, the Company aims to encourage top in forward­looking issues for the business as appropriate for performance, with the objective of ensuring outstanding the right target group.

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Another key aspect of HR activities has been the need to deal is a response to the changes in employee requirements. It with the Covid­19 pandemic and the associated new re­ enables the Company to carry out quantitative HR planning quirements for managers and employees to work remotely. and detailed analysis based on job clusters and skills and Because of the pandemic, the vast majority of employees qualifications. have been working from home. To facilitate this, processes The objective of the Leadership in Transformation pro­ have been transformed and technical requirements put in gram initiated in 2019 is to provide managers with the capa­ place in the shortest possible time. Employees have been bility to deal with digital transformation successfully. The equipped with laptops and the necessary access authoriza­ three words “Learn – Inspire – Transfer” are intended to sum tions established. In this context, a large number of initia­ up the approach. In addition to the mandatory and modular tives for digitalizing HR products and processes have been program “Erfolgreich durchstarten” (hit the ground running) implemented. For example, seminars and mandatory train­ for new and newly appointed managers, there are advanced ing sessions are offered online and events are held using modules for enhancing the management know­how of expe­ Skype. Job interviews and employee appraisal sessions are rienced managers, as well as the option of an individual re­ also conducted remotely. In addition, the Occupational view to assess the current level of a manager’s skills. Health & Safety department conducted work station approv­ From the “Inspire” and “Transfer” perspectives, BarCamps als and hygiene protocols have been implemented. These and the “Time for Stimulus” format offer all managers the measures aim to ensure that employees who can only do opportunity to improve their knowledge about current is­ their jobs at the Company’s offices are provided with the best sues. They can obtain support for specific management situa­ possible protection. Necessary measures are regularly dis­ tions; internal and external facilitators help them analyze cussed, decided upon and then communicated by the crisis and enhance their leadership skills. Following a successful team with the involvement of appropriate experts. In order to pilot project, a language analysis tool was also used in 2020 as ensure employees and managers were informed quickly and a voluntary development mechanism for all managers and comprehensively, a total of 55 HR bulletins were sent to the program leaders. Language analysis is based on artificial entire workforce and 44 special notices to managers in 2020 intelligence and can raise managers’ awareness of the im­ via e­mail. portance of language and its effects, particularly when many The HR Transformation program was set up in 2018. employees are working remotely. The aim is to help managers Transformation refers to all the changes that employees can find the right way of communicating in times of change so expect in the business over the coming years as a result of that there is optimum support and engagement from em­ digitalization or efficiency programs. HR Transformation ployees. means everything involving the employees who are shaping Volkswagen Financial Services AG thus ensures consistent the transformation process or are affected by it. The trans­ quality standards of management conduct and know­how, as formation of Volkswagen Financial Services represents a well as a shared understanding of the leadership culture as challenge to the flexibility of all employees and managers. set out by the FS Way for more than 350 employees with line The HR Transformation program sets the framework in management responsibilities. which all employees – regardless of the extent to which they The international subsidiaries also attach great im­ are affected – can make an individual contribution to the portance to continuously enhancing management skills in success of the transformation. In addition to placing employ­ line with prevailing requirements. For example, FS Australia ees in new jobs, the program also establishes the basic condi­ offered all managers support to help them lead teams work­ tions, addresses key questions, sets out processes and speci­ ing remotely during periods of crisis. fies the skills and qualifications required. The The Company assesses the extent to which it has achieved Transformation Office established in connection with the its objective of being a top employer by regularly taking part project supports the change process in respect of the internal in external employer competitions. The aim is to continue to labor market. Its centralized management at the Braun­ enhance working conditions and implement corresponding schweig facilities ensures that vacant positions are taken up action in an effort to be included in the list of TOP20 employ­ primarily by internal job applicants whose previous roles ers in the “Great Place to Work” employer ranking by 2025, have been discontinued. This aims to ensure that there is a not just in Europe but worldwide. In 2019, Volkswagen transparent procedure throughout the whole site. The em­ Financial Services AG was ranked number one in the relevant ployees concerned receive assistance in the form of special category by company size in both the “Best Employer in Low­ training. The Transformation Office holds information events er Saxony­Bremen 2019” and “Best Employer in Germany in the various departments and maintains continuous con­ 2019” competitions. In a comparison within Europe, the tact with employees and managers. It is a source of detailed Company was placed eleventh in a ranking of the top 25 Eu­ advice and support in connection with all issues related to ropean employers, which was an improvement on the twelfth the internal labor market. There are similar approaches at the place achieved in 2016. These results were based on the rank­ international facilities. The Strategic HR Planning subproject ings in each country, for example sixth place in Norway and

Volkswagen Financial Services AG | Annual Report 2020 Combined Management Report Human Resources Report 33

28th place in Spain. The Company entered the competition opment, remuneration, disciplinary processes and employee again in 2020. The rankings in the German, European and retention), giving these issues greater focus. The Group’s wider international competitions are expected to be an­ minimum standards underlying the initiatives have been set nounced during the course of 2021. down in an organizational policy. Customer satisfaction with the work of the employees is given top priority at Volkswagen Financial Services AG. The HUMAN RESOURCES PLAN NING AND DEVELOPMENT results of external and internal customer satisfaction surveys In 2020, 44 new vocational trainees/dual vocational training are used as indicators of target achievement. The internal students started their professional careers at Volkswagen customer feedback system, which analyses internal collabora­ Financial Services AG in Braunschweig, focusing on specialist tion, has now been introduced in 22 countries. Volkswagen professional IT qualifications in application development and Financial Services AG already offers competitive, perfor­ professional banking qualifications. The dual approach com­ mance­related remuneration. Performance appraisals are bines vocational training with study for a university degree. conducted as part of the annual staff dialogs in almost all The Bachelor of Arts in Business Administration focusing on international subsidiaries. digital marketing & sales and financial services management is offered in collaboration with Welfen Akademie e. V. and IMPLEMENTATION OF TH E CO RPORATE STRATEGY was initiated in a partnership with Volkswagen Financial The ROUTE2025 strategy is complemented by “The FS Way” Services AG. The combination of vocational training and and the associated leadership and management principles. studies for a Bachelor of Science in Business Informatics and The FS Way describes the Company’s corporate and leader­ Bachelor of Science in IT Security is offered in collaboration ship culture, i.e. the way in which the objectives of the five with Leibniz University of Applied Sciences. In 2020, voca­ strategic areas for action – customers, employees, operational tional trainees were once again recruited predominantly to excellence, profitability and volume – can be achieved to train for specialist professional IT qualifications in applica­ enable the Company, as an automotive financial services tion development, and dual vocational training students provider, to live up to its strategic vision of being “The Key to mainly to become business informatics specialists, with a Mobility”. The FS Way is anchored in the five FS values: living view to designing vocational training on a forward­looking commitment to customers, responsibility, trust, courage and basis and incorporating the topic of digitalization. A degree enthusiasm, combined with an attitude of continuously study program in computer science is also offered at the looking to improve and proactively making the changes this Braunschweig University of Technology. The training offering requires. The FS values are complemented by the new basic has been expanded to include the vocational field of media principles of the Volkswagen Group, known as the Essentials. design. The FS values are repeatedly explored and discussed at events As of December 31, 2020, a total of 131 vocational train­ for managers and employees, especially with a view to digital ees and dual vocational training students were employed in transformation, and then put into practice. Germany across all levels and professions. In Germany, a total Together4Integrity (T4I), an integrity and compliance of 43 vocational trainees were offered permanent positions in program for the entire Group launched in the second half of the reporting period. 2018, was continued in 2020. The international rollout was Skilled, committed employees are the cornerstones of concentrated mainly in the EU East, EU West and EU4 regions, the success of Volkswagen Financial Services AG as a busi­ notably in Poland, Portugal and France. The program focuses ness. To ensure that the Company is structured to deal with on the strategic issues of compliance, culture and integrity in future challenges, Volkswagen Financial Services AG aims to relation to processes, structures, attitudes and conduct. It recruit specialists and experts to complement the existing contributes to the refinement and improvement of the cor­ workforce. It is hugely important for the Company to con­ porate culture at Volkswagen Financial Services AG by organ­ tinuously analyze its own business, competitors and target izing and tracking integrity and compliance initiatives groups, especially in view of the shortage of specialists in the throughout the Group. Following the successful completion IT sector. of the U.S. Compliance Monitorship in 2020, the program will Candidates are supported by a quick, efficient and trans­ be continued in 2021 and thereafter in accordance with the parent application process, referred to as the Candidate Jour­ Group’s master plan. ney. An application using the SuccessFactors recruiting tool The HR unit aims to use its processes, tools, rules and pol­ clears the administrative hurdle. This applies to both external icies to make a significant contribution to the creation of a and internal applications. The traditional cover letter is no working environment in which the values and conduct re­ longer required; applicants simply need to upload a career quirements of Volkswagen Financial Services AG are taken history. The selection procedure focuses on candidates and seriously. The objectives of the T4I initiatives assigned to the whether they are suitable for Volkswagen Financial Services HR unit are to enshrine the issues of integrity and compli­ AG and the position in question. On Match Day, applicants ance in key HR processes (recruitment, professional devel­ are provided with information on their intended area of

Volkswagen Financial Services AG | Annual Report 2020 34 Human Resources Report Combined Management Report

employment and are able to meet their potential colleagues. first time with 20 places being allocated. This development This is an opportunity for both sides to gain a first impres­ opportunity is presented entirely online and can therefore be sion of working together in the future. completed at any time or place at the convenience of the Volkswagen Financial Services AG is also pursuing a rig­ employee concerned. Volkswagen Financial Services bears the orous approach to recruiting and retaining young talent. The cost of this training. The following university courses were recruitment process was fully digitalized in April of the re­ offered in 2020: UX Design B.A., Data Science B.Sc., Digital porting year so that the selection procedure could be main­ Business B.A., Artificial Intelligence M.Sc. and Computer tained, even under the restrictions caused by the Covid­19 Science in Cyber Security M.Sc. Long­term, intensive skills pandemic. HR marketing has also developed the “You like to development is offered through the university courses. move IT” campaign, which is aimed at school students who Online courses support medium­term skills development are thinking of a future career in which they are able to create with the aim of improving the skills required in the Company or motivate, ideally in IT. Each year, the Company also invites in the digital world. The different skills development formats applications from university graduates for the eight places with varying degrees of intensity take into account differing available on the 12­month Digital Talents trainee program, employees, their needs and the ways in which they can be which takes place both in Germany and abroad and focuses deployed in the business. These skills development activities on the digitalization of the Company’s products. This is an­ support the HR Transformation program. other part of the foundations that help the Company to safe­ All information on training offered by the FS Academy guard its future viability. The development program for (list of courses, specialist forums, lectures/presentations and young graduates is complemented by a three­year doctoral e­learning sessions) is available centrally (with a booking program. Collaboration agreements with universities, such as option) via FS Academy Online, the Academy’s dedicated Hildesheim University, offer departments and students the digital learning platform. The learning platform supports the opportunity to transfer knowledge from research to practice entire training process for employees, including the search and vice versa, thereby facilitating regular information­ for a suitable learning opportunity, registration, participation sharing on new methods and applications. In the area of data and, subsequently, the digital provision of materials, such as science and artificial intelligence (AI), such cooperation ena­ photographic material, handouts and participation certifi­ bles, for example, the Company to use state­of­the­art scien­ cates. In addition, employees can use FS Academy Online to tific methods and is therefore being extended by a further participate in different types of digital learning formats such two years until the end of 2022. as e­learning. The bulk of the skills development offering has As part of the reorganization, all HR professional devel­ also been transferred to a digital format so that employees opment and qualification matters have been restructured are able to learn wherever they happen to be and, in some from a strategic perspective and assigned to one of two units cases, at any time they choose. in the business partner model (Leadership, Culture and To promote employee participation in the transformation Change on the one hand, and Skills and Qualifications Man­ and thereby support the transformation processes in the agement on the other). The objective is to ensure that all Company, Volkswagen Financial Services AG initiated a new activities are oriented around the business of Volkswagen ideas and innovation management system in the reporting Financial Services AG with a strategic focus on professional year under the name “FS.IDEAS”. All employees are encour­ and skills development as a primary component of the HR aged to submit their ideas for conventional improvements or core business. innovative changes. Ideas are sent in by using an online tool The range of skills development options is concentrated that can be seen by all employees, thus creating transparency mainly on issues connected with preparing for change as part in respect of both the ideas and the process. Event months of the business and cultural transformation. Key areas are are held across the whole of the Group, during which time the skills and vocations of the future alongside social and meth­ Company puts incentives in place to encourage employees to odological know­how, for example in an agile working envi­ submit ideas. In the system, the Company activates the func­ ronment. tion allowing employees to add comments and likes, which The importance of digitalization knowledge and experi­ represents a new form of involvement and appreciation be­ ence is growing steadily – even within Volkswagen Financial tween colleagues. This approach fosters an environment in Services AG. As a business, the Company has an interest in which employees share in the refinement of ideas and col­ ensuring that its employees receive professional develop­ laborate across departments and disciplines. If expert teams ment in growth areas so they have the capability to adapt to approve ideas that have been put forward, the ideas are then changing job requirements. HR and the digital program have implemented by the relevant departments. If an idea is together developed a joint offering targeted at all employees thought to be particularly beneficial, the originator may also who wish to receive professional development in connection be able to make a short pitch to a panel consisting of board with digitalization. In 2020, digitalization study programs members and members of the Works Council with a view to and courses over a number of months were offered for the obtaining implementation support.

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CORPORATE GOVERNANCE DECLARATION upper management level was 19 %. Internationally, the overall Increase in the Proportion of Women proportion of women at Volkswagen Financial Services AG

As of December 31, 2020, women accounted for 47.7 % of the was 49 % in 2020. workforce of Volkswagen Financial Services AG in Germany, The Board of Management maintains the necessary but this is not yet reflected in the percentage of women in transparency through regular progress reports. management positions. Volkswagen Financial Services AG is striving to meet the targets it set itself in 2010 and revised in DIVERSITY 2016 in line with the Gesetz zur gleichberechtigten Teilhabe In addition to the advancement of women, the concept of von Frauen und Männern in Führungspositionen (Füh­ diversity has been an integral component of the corporate rposGleichberG – German Act on the Equal Representation of culture at Volkswagen Financial Services AG since 2002. Women and Men in Management Positions) with regard to Volkswagen Financial Services AG sent a clear signal with its the proportion of women in management, on the Board of corporate initiative, the Diversity Charter, which was signed Management and on the Supervisory Board. The Company in 2007. Under this initiative, the Company has pledged to has set itself the objective of increasing the proportion of respect and value diversity, and to promote employees ac­ women in management positions over the long term. As part cording to their skills and ability. In 2018, Volkswagen of succession planning, female candidates are systematically Financial Services AG adopted a Diversity Policy to reinforce considered with the aim of complying with the relevant tar­ this approach and enshrined the policy in its organizational gets. manual. The Diversity Policy ensures that diversity is recog­ In 2018, the targets to be achieved by 2023 were redefined nized as the norm rather than an exception. Diversity be­ as a result of the separation of Volkswagen Bank GmbH from comes a strength through the conscious appreciation of the Volkswagen Financial Services AG and were then approved by workforce. Volkswagen Financial Services AG operates at an the Board of Management. international level and thus workforce diversity is a substan­ tial factor in the successful performance of the business. Proportion of Women – Target and Actual Values for Germany The Diversity wins@Volkswagen program, which is bind­ ing for all managers throughout the Group, makes a further contribution to fostering the concept of diversity. The aim of Target 2023 Target 2020 Actual 2020 the program is to raise awareness of diversity and equal op­

portunities, to ensure that the added value of diversity is Second management recognized and learned, and to develop an understanding of 26.8 level 27.8 26.1 the obstacles that need to be overcome on the way to diversi­ First management 14.7 ty in the Company. Workshops are held as part of the pro­ level 16.8 13.9 gram to raise the awareness of all managers about the issue of diversity and equal opportunities.

Volkswagen Financial Services AG promotes a family­ The targets for the first and second management levels in friendly environment and offers numerous and continuously Germany have therefore been attained. expanding initiatives and programs aimed at achieving the The Supervisory Board has set the following targets for right work­life balance, such as various work­time models the proportion of women to be achieved by the end of 2021: and company childcare facilities. “Frech Daxe”, the company 25.0 % for the Supervisory Board and 16.7 % for the Board of childcare facility of Volkswagen Financial Services AG, which Management. At the end of 2020, the proportion of women is operated by Impuls Soziales Management GmbH & Co. KG, on the Supervisory Board was 33.3 %; the equivalent figure for is in close proximity to the Company’s offices. It has capacity the Board of Management was 25.0 %. for up to 180 children and offers flexible hours of care, as well Volkswagen Financial Services AG also pays close atten­ as care for schoolchildren during school holidays, thus mak­ tion to diversity, and therefore to the proportion of women, ing a substantial contribution to helping employees achieve a at an international level. In 2020, women held 22.5 % of man­ work­life balance. agement positions globally. The proportion of women at the

Volkswagen Financial Services AG | Annual Report 2020 36 Report on Expected Developments Combined Management Report

Report on Expected Developments

Growth in the global economy is expected to recover overall in 2021. Global demand for passenger cars will probably vary from region to region and increase noticeably year­on­year.

The main opportunities and risks arising from the operat­ expected to recover as well, albeit at a somewhat slower pace ing activities having been set out in the report on opportu­ given that only slight growth is anticipated for the Russian nities and risks, the section below now outlines the ex­ economy. pected future developments. These developments give rise For Turkey, we expect an increasing economic growth rate to opportunities and potential benefits that are included in combined with high inflation and a weak domestic currency. the planning process on an ongoing basis so that The South African economy will probably be dominated by Volkswagen Financial Services AG can exploit them as soon political uncertainty and social tensions again in 2021 result­ as possible. ing from high unemployment, among other factors. Despite The assumptions are based on current estimates by third­ the sharp slump in the past fiscal year, we therefore expect party institutions. These include economic research insti­ only moderate growth. tutes, banks, multinational organizations and consulting firms. Germany We expect gross domestic product (GDP) in Germany to grow DEVELOPMENTS IN THE GLOBAL ECONOMY at a relatively robust pace in 2021 but to remain short of its Our planning is based on the assumption that global eco­ pre­pandemic level. The labor market situation is likely to nomic output will recover overall in 2021, provided lasting deteriorate somewhat depending, among other things, on a containment of the Covid­19 pandemic is achieved. This delayed increase in corporate insolvencies following the growth will most likely be sufficient for the economy to suspension of the obligation to file for insolvency during the recover to approximately its pre­pandemic level. We contin­ pandemic. ue to believe that risks will arise from protectionist tenden­ cies, turbulence in the financial markets and structural defi­ North America cits in individual countries. In addition, growth prospects We anticipate a distinct improvement in the economic will be negatively impacted by ongoing geopolitical tensions situation in the USA in 2021, despite a declining but still and conflicts. We anticipate that both the advanced econo­ relatively high unemployment rate. The US Federal Reserve mies and the emerging markets will experience positive will probably leave key interest rates close to zero. Economic momentum. growth is also likely to increase distinctly in neighboring Furthermore, we anticipate that the global economy will Canada and Mexico, albeit in Mexico probably not at the also continue to grow in the period from 2022 to 2025. same pace compared with the relatively sharp decline in the reporting year. Europe/Other Markets In Western Europe, we expect moderate economic growth in South America 2021 after the downturn in the last fiscal year. The impact of In all probability, the Brazilian economy will recover in 2021 the Covid­19 pandemic and the uncertain consequences of and record a moderate rate of growth. After three years of the United Kingdom’s withdrawal from the EU will funda­ negative GDP growth rates, we anticipate only little im­ mentally pose major challenges. provement in the economic situation in Argentina. We also anticipate moderate growth rates in Central Eu­ rope in 2021. The economic situation in Eastern Europe is

Volkswagen Financial Services AG | Annual Report 2020 Combined Management Report Report on Expected Developments 37

Asia­Pacific Trends in the markets for light commercial vehicles in the The Chinese economy will probably continue growing at a individual regions will also be mixed in 2021; on the whole, relatively high level in 2021 after being one of the few econ­ we anticipate a moderate rise in demand for 2021, assuming a omies not to experience a recession in 2020. After a sharp successful containment of the Covid­19 pandemic. For the contraction in the reporting year, we also expect a relatively years 2022 to 2025, we expect demand for light commercial high rate of expansion for the Indian economy in 2021, out­ vehicles to increase globally. pacing the average growth seen in the years before the Covid­ We believe we are well prepared overall for the future chal­ 19 pandemic. In Japan, we anticipate a solid rise in GDP lenges pertaining to automobility business activities and for the growth. mixed development of the regional automotive markets. Our brand diversity, our presence in all major world markets, our TRENDS IN THE MARKET S FOR FINANCIAL SERV ICES broad and selectively expanded product range, and our tech­ Volkswagen Financial Services AG believes that automotive nologies and services put us in a good competitive position financial services will play a significant role in global vehicle worldwide. With electric drives, digital connectivity and auton­ sales in 2021, particularly because of the ongoing challenges omous driving, we want to make the automobile cleaner, quiet­ resulting from the Covid­19 pandemic. We expect demand to er, more intelligent and safer. With an appealing product portfo­ rise in emerging markets where market penetration has so far lio of impressive vehicles and forward­looking, tailor­made been low. Regions that already benefit from developed auto­ mobility solutions we have set ourselves the goal of continuing motive financial services markets will see a continuation of to excite our customers and to meet their diverse needs. the trend toward customers requiring mobility at the lowest possible total cost. Integrated end­to­end solutions, compris­ Europe/Other Markets ing mobility­related service modules such as insurance and For 2021, we anticipate that the volume of new passenger car innovative packages of services, will become increasingly registrations in Western Europe will be significantly above that important in this regard. Additionally, we expect demand to recorded in the reporting year. At the same time, however, increase for new forms of mobility, such as rental services, possible consequences of the pandemic and the uncertain and for integrated mobility services, for example parking, impact of the United Kingdom’s exit from the EU may result in refueling and charging and that the initiated shift from fi­ ongoing uncertainty among consumers and dampen demand. nancing to lease contracts will continue in the leasing busi­ Despite this, we expect a strong increase in the United King­ ness. We anticipate that this trend will continue in the period dom in 2021. In Italy, Spain and France, the markets are likely from 2022 to 2025. to significantly exceed the level seen in the reporting year. In the mid­sized and heavy commercial vehicles cate­ For light commercial vehicles, we anticipate demand in gory, we expect rising demand for financial services prod­ Western Europe in 2021 to be noticeably up on the previous ucts in emerging markets. In these countries in particular, year’s level despite the possible consequences of the pandem­ financing solutions support vehicle sales and are thus an ic and the uncertain impact of the United Kingdom’s exit essential component of the sales process. In mature mar­ from the EU. We predict a moderate to large increase in Italy, kets, we are projecting increased demand in 2021 for France, Spain and the United Kingdom. telematics services and services aimed at reducing total Sales of passenger cars in 2021 are expected to distinctly ex­ operating costs. This trend is also expected to continue in ceed the prior­year figures in markets in Central and Eastern the period 2022 to 2025. Europe. In Russia, we anticipate a moderate year­on­year in­ crease in market volume. In the region’s other markets, a slight TRENDS IN THE MARKET S FOR PASSENGER CARS A N D L I GHT to strong rise in the number of new registrations is expected. COMMERCIAL VEHICLES Registrations of light commercial vehicles in the Central We predict that trends in the markets for passenger cars in the and Eastern European markets in 2021 will probably be dis­ individual regions will be mixed in 2021. Overall, the volume of tinctly higher than in the previous year. We predict a moder­ demand worldwide for new vehicles is expected to be noticea­ ate increase in market volume for Russia. bly up on the reporting year, but will not reach the pre­ The volume of the passenger car market in Turkey in 2021 pandemic level, provided successful containment of the Covid­ is expected to remain at the previous year’s level. The volume 19 pandemic is achieved. We are forecasting growing demand of new registrations in South Africa in 2021 is likely to be for passenger cars worldwide in the period from 2022 to 2025. substantially higher year­on­year.

Volkswagen Financial Services AG | Annual Report 2020 38 Report on Expected Developments Combined Management Report

Germany (–20.1 %). Despite the ongoing uncertainty generated by the In the German passenger car market, we expect a moderate Covid­19 pandemic, a recovery could be seen in almost all of year­on­year increase in demand in 2021. the markets that are relevant for the Volkswagen Group in the We also anticipate that registrations of light commercial second half of 2020 compared with the first six months. vehicles will be noticeably up on the previous year. In the 27 EU states excluding Malta, but plus the United

Kingdom, Norway and Switzerland (EU27+ 3), the number of North America new truck registrations was sharply down on the prior­year

The volume of demand in the markets for passenger cars and figure, dropping –27.4 % to a total of 273 thousand vehicles. light commercial vehicles (up to 6.35 tonnes) in North Ameri­ Registrations in Germany, the largest market in this region, ca as a whole and in the USA in 2021 is likely to be distinctly fell substantially year­on­year. The previously anticipated higher than the previous year’s level. Demand will probably downturn in the market for 2020 was amplified by the Covid­ remain highest for models in the SUV and pickup segments. 19 pandemic, especially in the second quarter of the year. The In Canada, the number of new registrations is also projected Russian market also deteriorated noticeably as a consequence to be significantly higher than the previous year’s level. For of the Covid­19 pandemic and the related economic fallout. Mexico, we expect demand to rise slightly compared with the Turkey saw new registrations more than double compared to reporting year. an admittedly very low prior­year figure. By contrast, the South African market declined considerably. In Brazil, the South America largest market in the South America region, demand for Owing to their dependence on demand for raw materials trucks was significantly below the level seen in the previous worldwide, the South American markets for passenger cars year as a result of the pandemic. and light commercial vehicles are heavily influenced by de­ Demand for buses in the markets that are relevant for the velopments in the global economy. We anticipate an overall Volkswagen Group was much lower than in the previous year large increase in new registrations in the South American as a consequence of the pandemic. All key markets within the

markets in 2021 compared with the previous year. In Brazil, EU27+ 3 contributed to this trend, with the market for coach­ the volume of demand is expected to increase substantially es in particular virtually grinding to a halt. Demand was very compared with 2020. We anticipate that demand in Argentina much lower in Brazil and was less than half the prior­year will be significantly higher year­on­year. level in Mexico.

Asia­Pacific INTEREST RATE TRENDS The passenger car markets in the Asia­Pacific region are ex­ The period of low interest rates continued in Europe, the USA pected to be noticeably up on the prior­year level in 2021. We and numerous other economies in 2020, and also at the be­ predict demand in China to also be noticeably higher than ginning of the current fiscal year. The outbreak of the pan­ the comparative figure for 2020. Attractively priced entry­ demic in the spring of 2020 led to economic setbacks, to level models in the SUV segment in particular should still see which central banks around the globe responded by further strong demand. As long as there is no resolution in sight, the loosening monetary policy. Interest rates are still at historic trade dispute between China and the United States is likely to lows. There is currently no end to the period of low interest continue to weigh on business and consumer confidence. We rates in sight. anticipate an appreciable increase in the Indian market com­ pared with the previous year. Japan should see slight growth MOBILITY CONCEPTS in market volume in 2021. Social and political factors have an increasing impact on many The market volume for light commercial vehicles in 2021 people’s individual mobility behavior. Among the general will probably be slightly higher than the previous year’s fig­ public, environmental and climate protection has grown ure. We are expecting demand in the Chinese market to be immensely in importance over the last few years and is at­ distinctly lower than in the previous year. For India, we are tracting increasing attention from lawmakers. Especially in forecasting a substantially higher volume in 2021 than in the large metropolitan areas, new challenges are appearing in reporting year. In the Japanese market, we expect demand to connection with the design of an intelligent mobility mix be comparable with the previous year. consisting of public transport combined with motorized and non­motorized private transport. In addition, new mobility T RE N DS I N THE MARKETS FOR CO MMERCIAL VEHICLES solutions will change the traditional perception of owning a In the markets that are relevant for the Volkswagen Group, vehicle. As a result, mobility is being redefined in many global demand for mid­sized and heavy trucks with a gross respects. weight of more than six tonnes was down substantially year­ Volkswagen Financial Services AG closely monitors devel­ on­year in fiscal year 2020 due to the spread of the opments in the mobility area and is working on new models SARS­CoV­2 virus: 460 thousand new vehicles were registered to support alternative marketing approaches and establish

Volkswagen Financial Services AG | Annual Report 2020 Combined Management Report Report on Expected Developments 39

new mobility concepts with the goal of securing and expand­ SUMMARY OF EXPECTED DEVELOPMENTS ing its existing business model. Simple, convenient, transpar­ Volkswagen Financial Services AG expects its growth in the ent, safe, reliable, flexible – these are the standards that the next fiscal year to be linked to the growth in unit sales of company set itself. Volkswagen Group vehicles. The Company aims to boost its In collaboration with the automotive brands of the business volume by expanding the product range in existing Volkswagen Group, Volkswagen Financial Services AG is aim­ markets. ing to get a leading position in the development of new mo­ Sales activities related to the Volkswagen Group brands bility services, as has been the case in the conventional au­ will be further intensified, particularly through joint strategic tomotive business for many years. projects. Furthermore, Volkswagen Financial Services AG Thanks to its subsidiaries, Volkswagen Financial Services intends to continue enhancing the leveraging of potential AG already covers a large proportion of the mobility needs of along the automotive value chain. its customers, including traditional leasing, long­term rental, Together with the Group brands, Volkswagen Financial car and truck rental, car sharing and car subscription. The Services AG aims to provide optimum solutions to satisfy the company has taken a huge step towards becoming a mobility wishes and needs of its customers. Its end customers are service provider with the expansion of vehicle­related mobili­ looking in particular for mobility with predictable fixed costs. ty services. Volkswagen Financial Services AG already offers a In addition, we intend to further expand the digitalization of portfolio of services fulfilling the customers’ desire for con­ our business. venience and flexibility. Efforts focus on the global expansion The product packages and mobility solutions successfully of payment solutions for digital business models within the launched in the last few years will be refined in line with Volkswagen Group, the further expansion of cashless and customer needs. mobile payment for parking in North America and Europe as In parallel with the Company’s market­based activities, well as the development of the electric vehicle charging and the position of Volkswagen Financial Services AG vis­à­vis its fuel card services in Europe. In addition, the Europe­wide global competitors will be further strengthened through processing of toll transactions was integrated into the ser­ strategic investment in structural projects as well as through vices for business customers. Further activities will focus on process optimization and productivity gains. driving forward the expansion of the fleet business. Volkswagen Financial Services AG partners with the Forecast for Credit and Residual Value Risk Volkswagen Group brands in the marketing for vehicles with As far as credit risk is concerned, it is anticipated that the risk internal combustion engines as well as for electric vehicles. situation will remain challenging in 2021 because of the Such marketing includes an attractive range of leasing services ongoing Covid­19 pandemic. The effects very much depend complemented by packages covering maintenance and wear­ on how the pandemic develops and on the macroeconomic and­tear repairs. Those services play a key role in the marketing impact in each region. Nevertheless, the volume of loans and of electric vehicles produced by the Volkswagen Group. receivables is projected to grow. Volkswagen Financial Services AG is also a partner of AU­ The Company continues to monitor the risk situation DI AG in the implementation of the e­tron Charging Service, closely so that it can respond proactively to any potential which provides customers buying the new Audi e­tron with developments by initiating targeted corrective measures. access to more than 184,000 public charging points in Europe. In the residual value portfolio, the volume of contracts is In this context, Volkswagen Financial Services AG contin­ projected to continue to grow in fiscal year 2021. In this case ues serving as a one­stop shop for its customers, remaining too, the main drivers will be the growth programs imple­ true to the essence of its company slogan “The Key to Mobili­ mented by the Company and further expansion in the fleet ty” also in the future. business.

N E W MA R KE TS/INTERNATIONALIZAT ION/NEW SEGMENTS Forecast for Liquidity Risk The financing, leasing, insurance and mobility services busi­ Taking into account the uncertainty on capital markets as a nesses are essential for attracting customers and developing result of the Covid­19 pandemic, the risk situation is still loyal, long­term customer relationships globally. Volkswagen considered to be stable. Established sources of funding re­ Financial Services AG, as financial services provider and stra­ main available. To ensure that this situation is maintained in tegic partner for the Volkswagen Group brands, specifically the long term, funding diversification continues to be ex­ reviews the implementation of these business areas in new tended in individual markets and existing sources of funding markets by developing market entry concepts in order to lay are being expanded. the foundations for profitable business volume growth there.

Volkswagen Financial Services AG | Annual Report 2020 40 Report on Expected Developments Combined Management Report

OUTLOOK FOR 2021 These costs depend on the development of the pandemic and Volkswagen Financial Services AG’s Board of Management the associated economic consequences. It is anticipated that expects global economic growth in 2021 to be higher than risk costs will still be higher compared with the situation the previous year’s level. Risks will arise first and foremost prior to Covid­19. from the consequences of the Covid­19 pandemic. In addi­ The Company forecasts that current contracts and business tion, growth prospects will be hurt by geopolitical tensions volume in 2021 will be significantly above the level of fiscal and conflicts. The emerging economies of Asia will probably year 2020. New contracts are expected to be significantly record the highest rates of growth. We expect growth in the above the prior­year level. It is assumed that the penetration major industrialized nations to be stronger than in 2020. rate will be slightly higher than the level in the previous year. Growth in individual countries and regions is heavily de­ Based on the effects described above and assuming that the pendent on the local course of the pandemic going forward. Covid­19 pandemic is increasingly contained, the operating Taking into account the aforementioned factors and market result for fiscal year 2021 is projected to be on a level with the trends, the overall picture is as follows: earnings expectations previous year. assume greater levels of cooperation with the individual The forecast earnings performance and stable capital ad­ Group brands, increased investment in digitalization for the equacy will probably result in a return on equity in 2021 that future, potential effects of geopolitical upheaval and contin­ is on a level with the previous year. Similarly, we anticipate ued uncertainty about macroeconomic conditions in the real the cost/income ratio in 2021 to be at the level of the prior economy. In this regard, risk costs have a significant impact. year.

FORECAST CHANGES IN KEY PERFORMANCE INDI CATORS FOR FISCAL YE AR 2021 COMPARED WIT H P RIO R­YEAR FIGURES

Actual 2020 Forecast for 2021

Nonfinancial performance indicators Penetration (percent) 27.6 > 27.6 Slightly above the previous year’s level Current contracts (thousands) 15,409 > 15,409 Significantly above the previous year’s level New contracts (thousands) 5,911 > 5,911 Significantly above the previous year’s level

Financial performance indicators Volume of business (€ million) 92,572 > 92,572 Significantly above the previous year’s level Operating result (€ million) 1,223 = 1,223 At prior­year level Return on equity (percent) 8.4 = 8.4 At prior­year level Cost/income ratio (percent) 57 = 57 At prior­year level

Volkswagen Financial Services AG | Annual Report 2020 Combined Management Report Report on Expected Developments 41

Braunschweig, February 15, 2021 The Board of Management

Lars Henner Santelmann Dr. Mario Daberkow

Frank Fiedler Dr. Alexandra Baum­Ceisig

This report contains forward­looking statements on the future business development Volkswagen Group will have a corresponding impact on the development of the business. of Volkswagen Financial Services AG. These statements are based on assumptions The same applies in the event of material changes in exchange rates against the euro. The relating to the development of the economic and legal environment in individual same applies should the actual effects of the Covid­19 pandemic differ from the scenario countries and economic regions in terms of the global economy and financial and assumed in this report. In addition, expected business development may vary if the automotive markets, which have been made on the basis of the information available assessments of the key performance indicators and of risks and opportunities presented in and which Volkswagen Financial Services AG currently considers to be realistic. The the 2020 Annual Report do not develop in line with current expectations, or additional estimates given entail a degree of risk, and the actual developments may differ from those risks and opportunities or other factors emerge that affect the development of the forecast. Any unexpected fall in demand or economic stagnation in the key sales markets of the business.

Volkswagen Financial Services AG | Annual Report 2020

CONSOLIDATED FINANCIAL 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS 49 General Information 43 Income Statement 49 Basis of Presentation 44 Statement of Comprehensive Income 50 Changes to Prior­Year Figures 45 Balance Sheet 52 Impact of the Covid­19 Pandemic 47 Statement of Changes in Equity 54 Effects of New and Revised IFRSs 48 Cash Flow Statement 55 New and Revised IFRSs Not Applied 56 Accounting Policies 78 Income Statement Disclosures 86 Balance Sheet Disclosures 110 Financial Instrument Disclosures 141 Segment Reporting 145 Other Disclosures 163 Shareholdings

171 Additional Information

171 Responsibility Statement 172 Independent Auditor’s Report 179 Report of the Supervisory Board Consolidated Financial Statements Income Statement 43

Income Statement of the Volkswagen Financial Services AG Group

Jan. 1 – Dec. 31, Jan. 1 – Dec. 31, € million Note 2020 2019 Change in percent

Interest income from lending transactions and marketable securities1 5, 8, 54 1,995 2,094 –4.7 Income from leasing transactions1 17,457 14,294 22.1 Depreciation, impairment losses and other expenses from leasing transactions –15,450 –12,378 24.8 Net income from leasing transactions1 5, 13, 64 2,006 1,917 4.6 Interest expense 5, 8, 19, 54 –1,286 –1,352 –4.9 Income from service contracts 2,100 1,738 20.8 Expenses from service contracts –1,646 –1,548 6.3 Net income from service contracts 5, 20 454 190 X Income from insurance transactions 345 318 8.5 Expenses from insurance transactions –190 –163 16.6 Net income from insurance business 16, 21 155 155 0.0 Provision for credit risks 8, 22, 54 –600 –294 X Fee and commission income 560 514 8.9 Fee and commission expenses1 –472 –358 31.8 Net fee and commission income1 5, 23 89 156 –42.9 Net gain or loss on hedges 8, 24 –50 –18 X Net gain/loss on financial instruments measured at fair value and on derecognition of financial assets measured at fair value through other comprehensive income 8, 25, 54 10 –100 X 5, 10 – 13, 15, General and administrative expenses 17, 26 –2,071 –2,006 3.2 Other operating income 1,586 1,442 10.0 Other operating expenses –1,064 –960 10.8 Net other operating income/expenses 5, 27 521 482 8.1 Operating result 1,223 1,223 0.0 Share of profits and losses of equity­accounted joint ventures 64 65 –1.5 Net gain/loss on miscellaneous financial assets 9, 28 –168 –14 X Other financial gains or losses 29 –81 –9 X Profit before tax 1,038 1,264 –17.9 Income tax expense 6, 30 –231 –374 –38.2 Profit after tax 806 890 –9.4 Profit after tax attributable to noncontrolling interests 0 0 0.0 Profit after tax attributable to Volkswagen AG 806 890 –9.4

1 Prior­year figures restated (see section Changes to Prior­Year Figures)

Volkswagen Financial Services AG | Annual Report 2020 44 Statement of Comprehensive Income Consolidated Financial Statements

Statement of Comprehensive Income

of the Volkswagen Financial Services AG Group

Jan. 1 – Dec. 31, Jan. 1 – Dec. 31, € million Note 2020 2019

Profit after tax 806 890 Pension plan remeasurements recognized in other comprehensive income 15, 46 Pension plan remeasurements recognized in other comprehensive income, before tax –62 –126 Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income 6, 30 22 36 Pension plan remeasurements recognized in other comprehensive income, net of tax –40 –90 Fair value valuation of equity instruments that will not be reclassified to profit or loss, net of tax 8 3 –3 Share of other comprehensive income of equity­accounted investments that will not be reclassified to profit or loss, net of tax 0 0 Items that will not be reclassified to profit or loss –37 –94 Exchange differences on translating foreign operations 4 Gains/losses on currency translation recognized in other comprehensive income –582 101 Transferred to profit or loss – – Exchange differences on translating foreign operations, before tax –582 101 Deferred taxes relating to exchange differences on translating foreign operations 6, 30 – – Exchange differences on translating foreign operations, net of tax –582 101 Hedging transactions 8 Fair value changes recognized in other comprehensive income (OCI I) 49 –17 Transferred to profit or loss (OCI I) –57 5 Cash flow hedges (OCI I), before tax –8 –12 Deferred taxes relating to cash flow hedges (OCI I) 6, 30 3 4 Cash flow hedges (OCI I), net of tax –5 –7 Fair value changes recognized in other comprehensive income (OCI II) 0 0 Transferred to profit or loss (OCI II) 0 0 Cash flow hedges (OCI II), before tax 0 0 Deferred taxes relating to cash flow hedges (OCI II) 6, 30 0 0 Cash flow hedges (OCI II), net of tax 0 0 Fair value valuation of debt instruments that may be reclassified to profit or loss 8 Fair value changes recognized in other comprehensive income 0 4 Transferred to profit or loss 1 1 Fair value valuation of debt instruments that may be reclassified to profit or loss, net of tax 1 5 Deferred taxes relating to fair value valuation of debt instruments that may be reclassified to profit and loss 6, 30 0 –1 Fair value valuation of debt instruments that may be reclassified to profit or loss, net of tax 1 3 Share of other comprehensive income of equity­accounted investments that may be reclassified to profit or loss, net of tax –28 2 Items that may be reclassified to profit or loss –615 99 Other comprehensive income, before tax –676 –34 Deferred taxes relating to other comprehensive income 24 39 Other comprehensive income, net of tax –652 5 Total comprehensive income 155 895

Total comprehensive income attributable to noncontrolling interests 0 0 Total comprehensive income attributable to Volkswagen AG 155 895

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Balance Sheet 45

Balance Sheet of the Volkswagen Financial Services AG Group

€ million Note Dec. 31, 2020 Dec. 31, 2019 Change in percent

Assets 7, 32, 54 – 58, Cash reserve 60 – 61 47 106 –55.7 Loans to and receivables from banks 8, 54 – 61 3,830 2,477 54.6 Loans to and receivables from customers attributable to Retail financing 21,006 20,712 1.4 Dealer financing 4,272 5,413 –21.1 Leasing business 39,984 39,951 0.1 Other loans and receivables 13,391 13,119 2.1 Total loans to and receivables from customers 8, 13, 33, 54 – 59, 61 78,652 79,195 –0.7 8, 34, 54 – 58, Derivative financial instruments 61 – 62 837 736 13.7 Marketable securities 8, 54 – 59, 61 312 305 2.3 Equity­accounted joint ventures 35, 55 743 737 0.8 Miscellaneous financial assets 8, 9, 54 – 58 460 591 –22.2 Intangible assets 10, 12, 36 92 91 1.1 Property and equipment 11, 12, 13, 37 494 498 –0.8 Lease assets 12, 13, 64 27,311 22,776 19.9 Investment property 12, 13, 14, 38, 64 15 17 –11.8 Deferred tax assets 6, 39 1,753 1,513 15.9 Current tax assets 6, 54 – 58 103 125 –17.6 Other assets 13, 40, 54 – 58 3,197 3,276 –2.4 Total 117,845 112,444 4.8

Volkswagen Financial Services AG | Annual Report 2020 46 Balance Sheet Consolidated Financial Statements

€ million Note Dec. 31, 2020 Dec. 31, 2019 Change in percent

Equity and Liabilities Liabilities to banks 8, 42, 54 – 58, 60 – 61 14,674 14,472 1.4 Liabilities to customers 8, 42, 54 – 58, 60 – 61 20,208 15,740 28.4 8, 43, 44, 54 – 58, Notes, commercial paper issued 60 – 61 61,988 60,943 1.7 Derivative financial instruments 8, 45, 54 – 58, 60 – 62 464 427 8.7 Provisions for pensions and other post­employment benefits 15, 46 596 505 18.0 Underwriting provisions and other provisions 16, 17, 47 827 940 –12.0 Deferred tax liabilities 6, 48 571 655 –12.8 Current tax liabilities 6, 54 – 58 548 373 46.9 Other liabilities 49, 54 – 58, 60 1,684 1,413 19.2 8, 44, 50, 54 – 58, Subordinated capital 60 – 61 3,526 4,947 –28.7 Equity 52 12,760 12,029 6.1 Subscribed capital 441 441 – Capital reserves 3,216 3,216 – Retained earnings 10,568 9,228 14.5 Other reserves –1.467 –859 70.8 Equity attributable to noncontrolling interests 2 2 0.0 Total 117,845 112,444 4.8

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Statement of Changes in Equity 47

Statement of Changes in Equity of the Volkswagen Financial Services AG Group

OTHER RESERVES Hedging transactions

Deferred Cash flow hedging Equity and Equity­ Non­ Subscribed Capital Retained Currency hedges costs debt accounted controlling € million capital reserves earnings translation (OCI I) (OCI II) instruments investments interests Total equity

Balance as of Jan. 1, 2019 441 1,600 6,812 –759 3 – 1 –84 2 8,016 Profit after tax – – 890 – – – – – 0 890 Other comprehensive income, net of tax – – –90 100 –7 0 0 2 0 5 Total comprehensive income – – 799 100 –7 0 0 2 0 895 Changes due to contribution in kind by the shareholder 1 Volkswagen AG – 617 2,261 –114 0 0 – – – 2,763 Capital increases – 1,000 – – – – – – – 1,000 Distribution of retained earnings – – –1,000 – – – – – – –1,000 Loss assumed by Volkswagen AG – – 268 – – – – – – 268 Other changes2 – – 87 0 – – – – – 87 Balance as of Dec. 31, 2019 441 3,216 9,228 –772 –5 0 1 –82 2 12,029

Balance as of Jan. 1, 2020 441 3,216 9,228 –772 –5 0 1 –82 2 12,029 Profit after tax – – 806 – – – – – 0 806 Other comprehensive income, net of tax – – –40 –582 –5 0 4 –28 –1 –652 Total comprehensive income – – 766 –582 –5 0 4 –28 0 155 Capital increases – – – – – – – – – – Loss assumed by Volkswagen AG – – 673 – – – – – – 673 Other changes3 – – –99 –1 – – – 4 – –96 Balance as of Dec. 31, 2020 441 3,216 10,568 –1,355 –10 0 5 –106 2 12,760

1 Changes due to contribution in kind by the shareholder Volkswagen AG 2 Mainly effects from the consolidation of Vehicle Trading International (VTI) GmbH and merger of Euromobil Autovermietung GmbH 3 Mainly effects from the consolidation of Volkswagen Financial Services Ireland Ltd., Dublin, Volkswagen Insurance Services, Correduria de Seguros, S.L., El Prat de Llobregat, Volkswagen Financial Services Polska Sp. z o.o., Warsaw, Volkswagen Financial Leasing Co., Ltd., Tianjin, VW New Mobility Services Investment Co., Ltd., Beijing, and the goodwill from the acquisition of the Irish business portfolio

Further information on equity is presented in note (52).

Volkswagen Financial Services AG | Annual Report 2020 48 Cash Flow Statement Consolidated Financial Statements

Cash Flow Statement

of the Volkswagen Financial Services AG Group

Jan. 1 – Dec. 31, Jan. 1 – Dec. 31, € million 2020 2019

Profit before tax1 1,038 1,264 Depreciation, amortization, impairment losses and reversals of impairment losses 5,003 3,422 Change in provisions 23 135 Change in other noncash items1 220 –272 Loss on disposal of financial assets and items of property and equipment 12 0 Net interest expense and dividend income2 –2,443 –2,222 Other adjustments 0 4 Change in loans to and receivables from banks –1,433 –171 Change in loans to and receivables from customers –503 –4,891 Change in lease assets –9,182 –6,555 Change in other assets related to operating activities 31 –507 Change in liabilities to banks 858 186 Change in liabilities to customers1 4,330 –133 Change in notes, commercial paper issued 2,230 8,413 Change in other liabilities related to operating activities 219 –95 Interest received2 3,722 3,567 Dividends received 6 7 Interest paid –1,286 –1,352 Income taxes paid –393 –462 Cash flows from operating activities1 2,453 338 Proceeds from disposal of investment property 1 0 Acquisition of investment property 0 – Proceeds from disposal of subsidiaries and joint ventures –12 27 Acquisition of subsidiaries and joint ventures –1,407 –215 Proceeds from disposal of other assets1 20 10 Acquisition of other assets1 –71 –68 Change in investments in marketable securities –17 –8 Cash flows from investing activities1 –1,485 –254 Proceeds from changes in capital – 1,000 Distribution to Volkswagen AG – –1,000 Loss assumed by Volkswagen AG 268 149 Change in cash funds attributable to subordinated capital –1,268 –166 Repayment of liabilities arising from leases1 –19 –21 Cash flows from financing activities1 –1,019 –38

Cash and cash equivalents at end of prior period 106 54 Cash flows from operating activities1 2,453 338 Cash flows from investing activities1 –1,485 –254 Cash flows from financing activities1 –1,019 –38 Effect of exchange rate changes –9 6 Cash and cash equivalents at end of period 47 106

1 The structure of the cash flow statement has been adjusted (see note (65) for disclosures). Prior year figures have been adjusted. 2 Prior­year figures restated (see section Changes to Prior­Year Figures) Disclosures on the cash flow statement are presented in note (65).

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 49

Notes to the Consolidated Financial Statements

of the Volkswagen Financial Services AG Group as of December 31, 2020

General Information

Volkswagen Financial Services Aktiengesellschaft (VW FS AG) has the legal structure of a stock corporation. It has its registered office at Gifhorner Strasse, Braunschweig, Germany, and is registered in the Braunschweig commercial register (HRB 3790). The object of the Company is to develop, sell and process its own and third­party financial services both in Germany and abroad, the purpose of such financial services being to support the business of Volkswagen AG and of Volkswagen AG’s affiliated companies. Volkswagen AG, Wolfsburg, is the sole shareholder of the parent company, VW FS AG. Volkswagen AG and VW FS AG have entered into a control and profit­and­loss transfer agreement. The annual financial statements of the companies in the VW FS AG Group are included in the consolidated financial statements of Volkswagen AG, Wolfsburg, which are published in the electronic German Federal Ga­ zette and Company Register.

Basis of Presentation

VW FS AG has prepared its consolidated financial statements for the year ended December 31, 2020 in accord­ ance with International Financial Reporting Standards (IFRSs), as adopted by the European Union (EU), and the interpretations issued by the International Financial Reporting Standards Interpretations Committee (IFRS IC) as well as in accordance with the additional disclosures required by German commercial law under sec­ tion 315e(1) of the Handelsgesetzbuch (HGB – German Commercial Code). All IFRSs issued by the International Accounting Standards Board (IASB) up to December 31, 2020 for which mandatory application was required in fiscal year 2020 in the EU have been taken into account in these consolidated financial statements. In addition to the income statement, the statement of comprehensive income and the balance sheet, the IFRS consolidated financial statements include the statement of changes in equity, the cash flow statement and the notes. The separate report on the risks associated with future development (risk report in accordance with section 315(1) of the HGB) can be found in the management report on pages 22 – 30. This includes the qualita­ tive disclosures on the nature and scope of risk from financial instruments required under IFRS 7. All the estimates and assumptions necessary as part of recognition and measurement in accordance with IFRS comply with the relevant standard, are continuously updated and are based on past experience and other factors, including expectations regarding future events that appear to be reasonable in the given circumstances. The assumptions made by the Company are explained in detail in the disclosures on management’s material estimates and assumptions. The Board of Management completed the preparation of these consolidated financial statements on Febru­ ary 15, 2021. This date marked the end of the period in which adjusting events after the reporting period were recognized.

Volkswagen Financial Services AG | Annual Report 2020 50 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Changes to Prior­Year Figures

Figures for 2019 have been restated because fees and commissions recognized using the effective interest method had been incorrectly reported under fee and commission expenses instead of under interest income. This restatement has led to reductions of €31 million in fee and commission expenses, of €22 million in inter­ est income from lending transactions and marketable securities and of €10 million in income from leasing transactions in the income statement. The profit before tax for fiscal year 2019 has not been affected by the restatement. In addition, this restatement has impacted the following items in the cash flow statement: net interest ex­ pense and dividend income (increased by €31 million) and interest received (decreased by €31 million). It has also affected tables and figures in note 23, Net Fee and Commission Income (decrease in fee and commission expenses of €31 million); note 54, Carrying Amounts, Gains or Losses and Income or Expenses in Respect of Financial Instruments, by Measurement Category (correction of the prior­year figure for financial assets measured at amortized cost from €2,148 million to €2,127 million in the table showing net gains or losses and income or expenses in respect of financial instruments, and of the figure for interest income from financial assets measured at amortized cost or at fair value through other comprehensive income from €2,160 million to €2,138 million); note 63, Breakdown by Geographical Market (table showing the breakdown by geographical market for 2019, Mexico column: reduction in interest income from lending transactions and marketable securities in respect of third parties from €305 million to €283 million, reduction in income from leasing transactions with third parties from €322 million to €313 million, reduction in net income from leasing transactions from €127 million to €117 million; table showing the reconciliation to consolidated revenue, 2019 column: reduction in segment revenue from €18,366 million to €18,334 million and reduction in Group reve­ nue from €18,672 million to €18,640 million) and note 64, Leases (reduction in the prior­year figure for interest income from the net investment in finance leases from €1,504 million to €1,494 million).

In the table of summarized financial information for material joint ventures in note 2, Basis of Consolidation, the prior­year figures have been restated with corrections for the missing disclosures under noncurrent finan­ cial liabilities from €0 million to €886 million and under current financial liabilities from €0 million to €1,317 million. In addition, the missing figure for dividends received has been added to the prior year (correc­ tion from €0 million to €12 million). In the reconciliation from the financial information to the carrying amount of the equity­accounted in­ vestment, the plus/minus sign used in the prior year for the dividends figure has been amended in line with the general logic for the use of plus/minus signs, with the result that the prior­year figure has changed from €– 20 million to €20 million.

In note 33, Loans to and Receivables from Customers, the prior­year figure for due loans to and receivables from customers has been corrected from €495 million to €497 million because the sublease receivables had not been included in the previous year.

In note 41, Noncurrent Assets, the prior­year figure for noncurrent loans to and receivables from customers has been restated from €18,494 million to €41,459 million following the incorrect classification of maturities in connection with lease receivables in the previous year.

In addition, the prior­year figures for loans to and receivables from customers in note 56, Fair Values of Finan­ cial Assets and Liabilities, have been restated as a result of a correction to the maturity structure in the previous year and the associated correction of the fair value. The fair value has been corrected from €39,034 million to €39,006 million and the difference from €113 million to €85 million. In the same context, the prior­year figure for loans to and receivables from customers at Level 3 in the table showing the allocation of financial instruments to the three­level fair value hierarchy by class in note 57, Meas­ urement Levels of Financial Assets and Liabilities, has been corrected from €37,791 million to €37,763 million.

In note 59, Default Risk, the prior­year figures for the reconciliation of the provision for credit risks have been restated because of an incorrect stage allocation in the previous year. This restatement comprises the following changes: increase in Stage 1 of €62 million to €461 million; increase in Stage 2 of €21 million to €376 million;

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 51

and decrease in Stage 3 of €83 million to €281 million. These corrections have been reported in the “Other changes within a stage” line item. The prior­year figures in the table presenting the gross carrying amounts of financial assets broken down by default risk rating class, likewise in note 59, Default Risk, have also been restated because of an incorrect default risk rating class and stage classification in the previous year. The gross carrying amounts in default risk rating class 1 and Stage 1 have been reduced by €82 million to €36,794 and the gross carrying amounts in default risk rating class 3 and Stage 3 increased by €82 million to €429 million. In note 62, Hedging Policy Disclosures, the rate for the Norwegian krone (NOK 9.6886) has been added to the prior­year figures for the average exchange rates. In addition, a disclosure of EUR (0.26%) has been corrected to NOK (0.26%) in the average interest rates used in the previous year. In note 64, Leases, the prior­year figures for non­discounted lease payments and the loss allowance on lease receivables in the table showing a reconciliation of the undiscounted lease payments under finance leases to the net investment in the leases have been restated because some of the loss allowance had not been included. As a consequence, the figures have increased in each case by €192 million. The same change is reflected in the prior­year table for the outstanding, undiscounted lease payments from finance leases expected for subsequent years. The prior­year figures have also increased by €192 million in this case. In the table presenting the income generated from operating leases, the prior­year figure for lease income has also been corrected because the rental income from investment property had not been included in this item. The figure has been restated, changing from €4,464 million to €4,466 million. Within the same note, the prior­year total in the table showing an overview of potential future cash out­ flows that have not been included in the measurement of the lease liabilities has been restated with a change from €69 million to €68 million as a result of a rounding correction.

The structure of the cash flow statement for the VW FS AG Group was modified in fiscal year 2020. Firstly, in a voluntary change of accounting policy, the profit before tax has been used as the starting point for reconciling the cash flows from operating activities. This modification is in line with a generally accepted cash flow statement structure and creates a more meaningful presentation for the users of the consolidated financial statements. In addition, modifications have been applied to the changes in liabilities to customers, proceeds from dis­ posal of other assets and acquisition of other assets line items to facilitate separate presentation of the outflows from lessees for repayment of the liabilities arising from leasing contracts within the cash flows from financing activities. The corresponding adjustments of prior­year figures are presented in note 65, Cash Flow Statement.

Volkswagen Financial Services AG | Annual Report 2020 52 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Impact of the Covid­19 Pandemic

Throughout the whole of 2020, the global spread of the SARS­COV­2 virus brought enormous disruption to all areas of everyday life and the economy. Automotive financial services were in high demand in 2020, particular­ ly in the first three months of the year. Nevertheless, the reporting period saw the Covid­19 pandemic exert downward pressure on the demand for financial services in virtually every region. The effects of the Covid­19 pandemic were noticeable worldwide, especially in the second quarter of 2020. Markets for automotive finan­ cial services staged a partial recovery in the third and fourth quarters. Taking into account the nature of the conditions in 2020 and the impact of the Covid­19 pandemic, the Board of Management of Volkswagen Financial Services AG nevertheless considers the Group’s business to have performed well. There are no indications that the ability of the business to continue as a going concern is im­ paired, as a result the consolidated financial statements have been prepared on a going concern basis. However, the Covid­19 pandemic has led to a higher level of estimation uncertainty overall. Because of the Covid­19 pandemic, regular reports were generated in 2020 on new business, the credit risk situation, realized residual values and payment deferrals. Particular attention was paid to the impact of the Covid­19 pandemic on the risk and liquidity situation in the dealer organization. This reporting provided a detailed, timely overview of the risk situation and the impact on the financial performance of the VW FS AG Group, enabling the situation to be managed. Risk situation calculations were also carried out differ­ ent ways in which the Covid­19 pandemic could develop. In terms of the Group’s overall portfolio, the credit risk situation in 2020 was strongly shaped by the Covid­ 19 pandemic. To avert and cushion the economic impact of the Covid­19 pandemic for customers, pinpointed measures such as payment deferrals and support for the dealer organization were established toghether with the brands. The international subsidiaries were granted a certain degree of latitude to develop their own re­ sponses. As a result, of which they designed targeted measures locally and adapted them in line with – or occa­ sionally over and above – specific local legal requirements (such as statutory payment moratoriums) and cus­ tomer needs. Payment deferrals were normally granted for a period of three to six months. These measures mitigated any effects of the Covid­19 pandemic on the Group’s credit risk, with the result that the credit risk situation deteriorated only slightly overall in 2020, while the volume of receivables remained stable. In the context of the provision for credit risks recognized under the expected credit loss model specified in IFRS 9, a significant rise in credit risk has not been assumed for deferred contracts without differentiation in accordance with published technical guidance relating to handling the impact of the pandemic. Instead, the rise in credit risk has been assessed by taking into account all available information and estimates. The period of payment deferrals granted has not been treated as a period of default. However, the rise in significant credit risk is being closely monitored within the internal risk management systems. Estimation uncertainty relates primarily to projected credit quality, taking into account forward­looking factors and the associated uncertainty that the macroeconomic impact of the pandemic in the future could be deeper and more protracted than anticipated. Occasionally, management needs to apply overlays in the provision for credit risks if the models used for credit risk cannot fully reflect the effects of the pandemic. All available and sufficiently reliable information relevant to the estimate is taken into account when recognizing overlays. Because of the short duration of deferrals, payment deferrals in connection with loans and leases do not have any material impact on the assets, liabilities or financial performance of the VW FS AG Group, for example in relation to the accounting treatment of contractual modifications. Despite the pandemic, the Group only experienced a marginal rise in residual value risk. Changes in residu­ al value risk continue to be closely monitored on an ongoing basis, leading to corresponding measures where required. Overall, the Group’s liquidity risk remained stable. This stability was achieved even though markets could not be accessed temporarily or could only be accessed on a limited basis or, in some cases, with significant premiums because of the Covid­19 pandemic. Regarding funding, the Group’s main sources of funding continued to be available and could be used as re­ quired – albeit in some cases with considerable additional spread markups – despite the uncertainty arising from the Covid­19 pandemic, especially in the second quarter. In addition to the annual impairment tests carried out on goodwill and other intangible assets with an in­ definite useful life, impairment tests were also conducted during the course of the year on equity investments in joint ventures and unconsolidated subsidiaries to assess the impact of the Covid­19 pandemic. As the

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 53

VW FS AG Group currently believes the pandemic to be a temporary event that will not have a lasting negative impact on the long­term performance of the Group, the planning years 2020 to 2021 used for the equity in­ vestment impairment tests related to the Covid­19 pandemic were based on last year’s planning information and adjusted in line with the latest projections regarding the effects of the pandemic. If a fully updated budget account, taking into account the effects of the Covid­19 pandemic, was already available at the time of the im­ pairment test, this account was used as the basis for the equity investment impairment test in question. In each case, cost of capital rates were updated on the date of the impairment test. The VW FS AG Group is subject to uncertainty in relation to estimate assumptions arising from the use of forward­looking planning information that could be affected by the development of the Covid­19 pandemic over time. Overall, the tests described above did not give rise to any requirement for the recognition of additional impairment losses. There was no evidence of impairment even in respect of the real estate used by the Company itself and reported under prop­ erty and equipment. For further information on the effects of the Covid­19 pandemic, please refer to the details set out in the Report on Economic Position and in the Report on Opportunities and Risks in the Management Report.

Volkswagen Financial Services AG | Annual Report 2020 54 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Effects of New and Revised IFRSs

VW FS AG has applied all financial reporting standards adopted by the EU and subject to mandatory application from fiscal year 2020. Amendments to the definition of a business in IFRS 3 (Business Combinations) came into force on Janu­ ary 1, 2020. The new definition specifies that, to be considered a business, a set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. In addition, the definition of outputs is limited primarily to providing goods and services for customers and to generating investment income. The ability solely to reduce costs is no longer encompassed by the definition. The amendments have also introduced an optional concentration test that can be used to assess whether an acquired set of activities and assets is a business or not. Amendments to IFRS 16 also came into force for annual reporting periods that began on or after June 1, 2020. These amendments introduced a practical expedient whereby lessees were exempted from having to consider whether a rent concession in connection with the Covid­19 pandemic relating to lease payments that originally would have been due on or before June 30, 2021 represented a lease modification and were allowed to account for such rent concessions as if they were not lease modifications. The VW FS AG Group is not making use of this option. It was also mandatory to apply the amendments to IFRS 9, IAS 39 and IFRS 7 (Interest Rate Benchmark Re­ form – Phase 1) from January 1, 2020. In the previous year, the VW FS AG Group had decided in favor of their voluntary early application. The amendments affect hedges in existence at the beginning of the reporting peri­ od or designated thereafter. In application of the accompanying exceptions available under the amendments, the VW FS AG Group believes that the recognized hedges remain effective and are not adversely impacted by the IBOR reform and that therefore no hedges need to be discontinued. Amendments to IAS 1 and IAS 8 also came into effect on January 1, 2020, clarifying and standardizing the definition of “material”.

The provisions mentioned above and the other amended provisions do not materially affect the VW FS AG Group’s financial position and financial performance.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 55

New and Revised IFRSs Not Applied

VW FS AG has not applied in its 2020 consolidated financial statements the following financial reporting stand­ ards that have already been issued by the IASB but were not yet subject to mandatory application in fiscal year 2020.

Published by Application Adopted Standard/interpretation the IASB requirement1 by EU Expected impact

Updating of references to the May 14, January 1, IFRS 3 Conceptual Framework 2020 2022 No No material impact Insurance Contracts – Extension of the Temporary June 25, January 1, IFRS 4 Exemption from Applying IFRS 9 2020 2021 Yes No impact IFRS 4; IFRS 7; IFRS 9; IFRS 16 and Interest Rate Benchmark Reform August 27, January 1, IAS 39 (Phase 2) 2020 2021 Yes No material impact May 18, January 1, Detailed description following the overview in IFRS 17 Insurance Contracts 2017 20232 No the table Insurance Contracts – June 25, January 1, Detailed description following the overview in IFRS 17 Amendments to IFRS 17 2020 2023 No the table January 23, January 1, IAS 1 Classification of liabilities 2020 2023 No No material impact Property, Plant and Equipment – May 14, January 1, IAS 16 Proceeds before Intended Use 2020 2022 No No material impact Provisions, Contingent Liabilities and Contingent Assets: Onerous Contracts – Cost of Fulfilling a May 14, January 1, IAS 37 Contract 2020 2022 No No material impact Annual Improvements to IFRS May 14, January 1, Standards 2018–20203 2020 2022 No No material impact

1 Requirement for initial application from the VW FS AG perspective 2 On June 25, 2020, the IASB published amendments to IFRS 17 that are intended to come into force in conjunction with the original standard on January 1, 2023. 3 Minor changes to a range of IFRSs (IFRS 1, IFRS 9 and IAS 41)

EXPECTED IMPACT OF IFRS 17 INSURANCE CONTRAC TS IFRS 17 applies to primary and reinsurance contracts in the VW FS AG Group. The insurance contracts held are subdivided into portfolios and measured on this basis. They are generally measured using a fulfillment com­ ponent (comprising future, discounted cash flows and a risk component) and a contractual service margin. The professional and technical implementation of IFRS 17 is being completed by the VW FS AG Group as part of a project. The future accounting for insurance contracts in accordance with IFRS 17 should, according to the current status, only be based on the “general measurement model” approach. In future, it will be mandatory to discount claims reserves for nonlife insurance contracts. A risk adjustment for non­financial risk must also be applied. From the perspective of the VW FS AG Group’s financial position and financial performance, the changed reporting and measurement methods, as, a whole are expected to result in a small earnings deferral and lower underwriting provisions. More extensive disclosures will be required after the standard is intro­ duced.

Volkswagen Financial Services AG | Annual Report 2020 56 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Accounting Policies

1. Basic Principles

All entities included in the basis of consolidation have prepared their annual financial statements as of the reporting date of December 31, 2020. Financial reporting in the VW FS AG Group complies with IFRS 10 and is on the basis of standard Group­ wide accounting policies. Unless otherwise stated, amounts are shown in millions of euros (€ million). All amounts shown are round­ ed, so minor discrepancies may arise when amounts are added together. Assets and liabilities are presented broadly in order of liquidity in accordance with IAS 1.60.

2. Basis of Consolidation

In addition to VW FS AG, the consolidated financial statements cover all significant German and non­German subsidiaries, including all structured entities, controlled directly or indirectly by VW FS AG. This is the case if VW FS AG has power over potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed, or has rights to, positive or negative variable returns from its involvement with the potential subsidi­ aries, and has the ability to use its power to influence those returns. In the case of the structured entities con­ solidated in the VW FS AG Group, VW FS AG holds no equity investment but nevertheless determines the main relevant activities remaining after the structure is created and thereby influences its own variable returns. The purpose of the structured entities is to facilitate asset­backed­securities transactions to fund the financial ser­ vices business. Subsidiaries are included in the consolidation from the date on which control comes into existence; they cease to be consolidated when control no longer exists. Subsidiaries in which activities are dormant or of low volume and that, individually and jointly, are of minor significance in the presentation of a true and fair view of the financial position, financial performance and cash flows of the VW FS AG Group are not consolidated. They are recognized in the consolidated financial statements under financial assets at cost, taking into account any necessary impairment losses or reversals of impairment losses. The equity method is used to account for material entities in which VW FS AG has the opportunity, directly or indirectly, to exercise significant influence over financial and operating policy decisions (associates) or in which VW FS AG directly or indirectly shares control (joint ventures). Joint ventures also include entities in which the VW FS AG Group controls a majority of the voting rights but whose partnership agreements or arti­ cles of association specify that key decisions may only be made unanimously. Associates and joint ventures of minor significance are not accounted for using the equity method but are reported under financial assets at cost, taking into account any necessary impairment losses or reversals of impairment losses.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 57

The composition of the VW FS AG Group is shown in the following table:

2020 2019

VW FS AG and consolidated subsidiaries Germany 8 9 International 47 43 Subsidiaries recognized at cost Germany 8 8 International 49 50 Associates, equity­accounted joint ventures Germany 3 2 International 7 7 Associates, joint ventures and equity investments recognized at cost Germany 5 5 International 9 9 Total 136 133

The list of all shareholdings in accordance with section 313(2) of the HGB and in accordance with IFRS 12.10 and IFRS 12.21 is included as an annex to the consolidated financial statements. The following consolidated German subsidiaries with the legal form of a corporation have satisfied the cri­ teria in section 264(3) of the HGB and have elected not to publish annual financial statements:

> Volim Volkswagen Immobilien Vermietgesellschaft für VW­/Audi­Händlerbetriebe mbH, Braunschweig > Volkswagen­Versicherungsdienst GmbH, Braunschweig > Volkswagen Insurance Brokers GmbH, Braunschweig > EURO­Leasing GmbH, Sittensen > Vehicle Trading International (VTI) GmbH, Braunschweig

The changes in the composition of the VW FS AG Group shown in the table above are explained below.

Volkswagen Financial Services AG | Annual Report 2020 58 Notes to the Consolidated Financial Statements Consolidated Financial Statements

SUBSIDIARIES The following subsidiaries, which had not previously been consolidated for reasons of materiality, were consol­ idated in the reporting period:

> Volkswagen Financial Services Ireland Ltd., Dublin > Volkswagen Insurance Services, Correduria de Seguros, S.L., El Prat de Llobregat > Volkswagen Financial Services Polska Sp. Z o.o., Warsaw > Volkswagen Financial Leasing Co., Ltd., Tianjin > Volkswagen New Mobility Services Investment Co., Ltd., Beijing

As of March 31, 2020, Volkswagen Financial Services Ireland Ltd., Dublin, acquired the Irish business portfolio (a business within the meaning of IFRS 3) of Volkswagen Bank GmbH, Ireland Branch, Dublin, for a purchase price of €1,328 million. The purchase price was paid in cash. The portfolio primarily consists of finance lease and dealer financing business. No cash or cash equivalents were acquired as part of the deal. As the transactions were under the common control of Volkswagen AG, the transferred assets and liabilities were measured using the existing group carrying amounts on the date of initial recognition (known as predecessor accounting). The difference between the acquired assets and liabilities and the purchase price amounted to €89 million and was recognized in equity.

The breakdown of the carrying amounts of the assets and liabilities on the acquisition date was as follows:

IFRS carrying amounts on the date of initial € million recognition

Loans to and receivables from customers attributable to 1,244 Dealer financing 185 Leasing business 1,039 Other loans and receivables 20 Other assets 3 Total assets 1,247 Liabilities to customers 6 Current tax liabilities 2 Total liabilities 8 Net assets 1,239

As part of an internal restructuring of the leasing business in Poland, the entire portfolio of the Warsaw branch of Volkswagen Leasing GmbH, Braunschweig, was spun off in May 2020 and transferred to Volkswagen Leasing Polen GmbH, Braunschweig, by way of a capital contribution in kind. Volkswagen Leasing Polen GmbH was then merged into Volkswagen Financial Services Polska Sp. Z o.o., Warsaw, Poland.

On August 31, 2020 and with retroactive effect from January 1, 2020, the consolidated subsidiary MAN Financial Services GmbH, Munich, was merged into Volkswagen Leasing GmbH, Braunschweig, likewise a consolidated subsidiary, and since then has been operated as a regional office of Volkswagen Leasing GmbH in Munich.

In February 2020, VW FS AG acquired 26% of the shares in Glinicke Leasing GmbH, Kassel. The company has now been renamed Digital Mobility Leasing GmbH. For reasons of materiality, the 26% equity investment in this associate is not accounted for using the equity method.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 59

In March 2020, all the shares in Schweizer Mathom AG, Düdingen, were taken over by a subsidiary of Volkswagen Financial Services AG. The company is not consolidated for reasons of materiality.

In June 2020, VW FS AG acquired all the shares in the start­up Voya GmbH, Hamburg, and its wholly owned subsidiary Voya Travel Technologies S.R.L., Bucharest, from a syndicate of investors. Voya is one of the leading providers of state­of­the­art business travel management. Both entities are not consolidated for reasons of materiality.

The wholly owned subsidiaries Volkswagen Mobility Services S.p.A., Bolzano, and LogPay Charge & Fuel Slo­ vakia s.r.o., Bratislava, which were newly established via subsidiaries of Volkswagen Financial Services AG in May and October of the reporting year respectively, are reported at cost for reasons of materiality.

The additions and disposals of special purpose entities in 2020 were as follows:

Additions: ­ Driver China Eleven Auto Loan Securitization Trust, Beijing ­ Driver China Ten Auto Loan Securitization Trust, Beijing

Disposals: ­ Driver Australia Two Pty. Ltd. Ashfield ­ Driver Brasil Three Banco Volkswagen Fundo de Investimento em Direitos Creditórios Financiamento de Veículos, Osasco ­ Driver Brasil Two Banco Volkswagen Fundo de Investimento em Direitos Creditórios Financiamento de Veícu­ los, Osasco

Other than the acquisition of the Irish portfolio, the changes described above did not have any material impact on the financial position or financial performance of the VW FS AG Group.

JOINT VENTURES From a Group perspective, the following three entities among the equity­accounted joint ventures require separate presentation because they were deemed material on the reporting date because of the size of the enti­ ty concerned. These three joint ventures are strategically important to the VW FS AG Group. They run the finan­ cial services business in the respective countries and thus help to promote vehicle sales in the Volkswagen Group.

Volkswagen Pon Financial Services B.V. The Volkswagen Pon Financial Services B.V. Group, whose registered office is situated in Amersfoort in the Netherlands, is a financial services provider offering leasing and insurance products for Volkswagen Group vehicles to business and private customers in the Netherlands. The VW FS AG Group and its partner in this joint venture, Pon Holdings B.V., have entered into an agreement for a long­term strategic partnership.

Volkswagen D’Ieteren Finance S.A. Volkswagen D’Ieteren Finance S.A. and its subsidiary D’Ieteren Lease S.A., whose registered offices are situated in Brussels, Belgium, are financial services providers offering financing and leasing products for Volkswagen Group vehicles to business and private customers in Belgium. The VW FS AG Group and joint ven­ ture partner D’Ieteren S.A. have a long­term strategic partnership agreement.

Volkswagen Møller Bilfinans A/S Volkswagen Møller Bilfinans A/S, whose registered office is situated in Oslo, Norway, is a financial services pro­ vider offering financing and leasing products for Volkswagen Group vehicles to business and private customers, predominantly in Norway. The VW FS AG Group and joint venture partner, Møllergruppen A/S, have entered into a long­term strategic partnership agreement.

Volkswagen Financial Services AG | Annual Report 2020 60 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Summarized financial information for the material joint ventures on a 100% basis:

VOLKSWAGEN PON FINANCIAL SERVICES B.V. VOLKSWAGEN D‘IETEREN VOLKSWAGEN MØLLER (NETHERLANDS) FINANCE S.A. (BELGIUM) BILFINANS A/S (NORWAY)

€ million 2020 2019 2020 2019 2020 2019

Shareholding (percent) 60% 60% 50% 50% 51% 51%

Loans to and receivables from banks 21 8 42 5 11 33 Loans to and receivables from customers 971 900 1,836 1,746 1,933 1,997 Lease assets 1,988 1,775 617 654 – – Other assets 338 276 130 146 13 17 Total 3,319 2,959 2,624 2,550 1,957 2,046 of which: noncurrent assets 2,776 2,560 1,607 1,556 1,623 1,597 of which: current assets 543 398 1,017 994 334 449 of which: cash 21 8 42 5 11 33

Liabilities to banks – – 2,299 2,203 1,503 1,599 Liabilities to customers 2,294 2,121 130 163 47 51 Notes, commercial paper issued 695 587 – – – – Other liabilities 164 74 17 15 70 67 Equity 167 177 178 170 338 329 Total 3,319 2,959 2,624 2,550 1,957 2,046 of which: noncurrent liabilities 1,791 1,654 963 896 657 516 of which: current liabilities 1,361 1,129 1,483 1,484 963 1,201 of which: noncurrent financial liabilities 1,778 1,641 955 8861 570 437 of which: current financial liabilities 1,157 1,067 1,344 1,3171 933 1,162

Revenue 1,020 914 701 675 105 100 of which: interest income 108 103 37 34 102 101 Expenses 1,007 882 688 651 70 68 of which: interest expense 26 20 11 9 28 35 of which: depreciation and amortization 412 373 120 117 9 4 Profit/loss from continuing operations, before tax 13 33 13 24 35 31 Income tax expense or income 3 9 5 7 8 7 Profit/loss from continuing operations, net of tax 10 24 8 17 27 24 Profit/loss from discontinued operations, net of tax – – – – – – Other comprehensive income, net of tax – 0 0 –1 – – Total comprehensive income 10 24 8 16 27 24 Dividends received 12 122 – – – –

1 The prior­year figures have been restated with corrections for the missing disclosures under noncurrent financial liabilities from €0 million to €886 million and under current financial liabilities from €0 million to €1,317 million (see section Changes to Prior­Year Figures). 2 The missing figure for dividends received has been added to the prior year (correction from €0 million to €12 million) (see section Changes to Prior­Year Figures).

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 61

Reconciliation from the financial information to the carrying amount of the equity­accounted investment:

Volkswagen Pon Volkswagen Volkswagen Financial Services D‘Ieteren Finance Møller BilFinans € million B.V. (Netherlands) S.A. (Belgium) A/S (Norway)

2019 Equity of the joint venture as of Jan. 1, 2019 173 153 302 Profit/loss 24 17 24 Other comprehensive income 0 –1 – Change in share capital – – – Exchange differences on translating foreign operations – – 2 Dividends 201 – – Equity of the joint venture as of Dec. 31, 2019 177 170 329 Share of equity 106 85 168 Goodwill/other 41 0 0 Carrying amount of the share of equity as of Dec. 31, 2019 146 85 168

2020 Equity of the joint venture as of Jan. 1, 2020 177 170 329 Profit/loss 10 8 27 Other comprehensive income – 0 – Change in share capital – – – Exchange differences on translating foreign operations – – –18 Dividends 20 – – Equity of the joint venture as of Dec. 31, 2020 167 178 338 Share of equity 100 89 172 Goodwill 41 0 0 Carrying amount of the share of equity as of Dec. 31, 2020 141 89 172

1 The plus/minus sign for the dividends figure has been amended in line with the general logic for the use of plus/minus signs, resulting in the change from €– 20 million to €20 million (see section Changes to Prior­Year Figures).

Summarized pro­rated financial information for the joint ventures that are immaterial when considered indi­ vidually:

€ million 2020 2019

Carrying amount of the share of equity as of Dec. 31 341 338 Profit/loss from continuing operations, net of tax 15 25 Profit/loss from discontinued operations, net of tax – – Other comprehensive income, net of tax 1 2 Total comprehensive income 16 27

In March 2020, Mobility Trader Holding GmbH implemented a capital increase, which was subscribed by Volkswagen Finance Luxemburg S.A., Strassen, Luxembourg, a wholly owned subsidiary of Volkswagen AG, Wolfsburg. As a result of this transaction, Volkswagen Financial Services AG’s shareholding in the joint venture declined to 44.44%. During the reporting year, this joint venture, which was previously measured at cost for reasons of materiality, was consolidated for the first time using the equity method and is included in the sum­ marized pro­rated financial information.

Volkswagen Financial Services AG | Annual Report 2020 62 Notes to the Consolidated Financial Statements Consolidated Financial Statements

There were no unrecognized losses relating to interests in joint ventures. Cash attributable to joint ventures amounting to €197 million (previous year: €276 million) was pledged as collateral in connection with ABS transactions and was therefore not available to the VW FS AG Group. Individ­ ual joint ventures are also subject to some restrictions; as a result, they are only able to transfer funds in the form of dividends after taking into account statutory and company­law requirements relating to capital ade­ quacy in these joint ventures.

Financial guarantees to joint ventures amounted to €70 million (previous year: €134 million). In addition, certain articles of incorporation or partnership agreements specify obligations to individual joint ventures to provide loans for the funding of the entities, where required. The exact amount of the obligations depends on the future funding requirements of each entity and may therefore vary from the loan amounts recognized on the balance sheet as of the reporting date.

3. Consolidation Methods

The assets and liabilities of the German and international entities included in the consolidated financial state­ ments are reported in accordance with the uniform accounting policies applicable throughout the VW FS AG Group. In the case of the equity­accounted investments, the pro rata equity is determined on the basis of the same accounting policies. The relevant figures are taken from the most recently audited annual financial statements of the entity concerned. Acquisitions are accounted for by offsetting the carrying amounts of the equity investments with the pro­ portionate amount of the remeasured equity of the subsidiaries on the date of acquisition or initial inclusion in the consolidated financial statements and in subsequent periods. When subsidiaries are consolidated for the first time, the assets and liabilities, together with contingent consideration, are recognized at fair value on the date of acquisition. Subsequent changes in the fair value of contingent consideration do not generally result in an adjustment of the acquisition­date measurement. Ac­ quisition­related costs that are not equity transaction costs are not added to the purchase price, but instead recognized as expenses. Goodwill arises when the purchase price of the investment exceeds the fair value of the identified assets less liabilities. Goodwill is tested for impairment at least once a year and additionally if rele­ vant events or changes in circumstances occur (impairment­only approach) to determine whether its carrying amount is recoverable. If the carrying amount of goodwill is higher than the recoverable amount, an impair­ ment loss is recognized. If this is not the case, there is no change in the carrying amount of goodwill compared with the previous year. If the purchase price of the investment is less than the net value of the identified assets and liabilities, the difference is recognized in profit or loss in the year of acquisition. Goodwill is accounted for at the subsidiaries in the functional currency of those subsidiaries. The net assets recognized at fair value as part of an acquisition transaction are depreciated or amortized over their relevant useful lives. If the useful life is indefinite, any requirement for the recognition of an impair­ ment loss is determined at individual asset level using a procedure similar to that used for goodwill. Where hidden reserves and charges in the recognized assets and liabilities are uncovered during the course of pur­ chase price allocation, these items are amortized over their remaining maturities. The acquisition method described above is not applied when subsidiaries are newly established; no good­ will or negative goodwill can arise when newly established subsidiaries are included in the consolidation. The assets and liabilities of the subsidiaries are recognized at their values on the date of initial consolidation. In the consolidation, the recognition and measurement arising from the independence of the individual companies is adjusted such that they are then presented as if they belonged to a single economic unit. Loans/receivables, liabilities, income and expenses relating to business relationships between consolidated entities are eliminated in the consolidation. Intragroup transactions are conducted on an arm’s­length basis. Any resulting intercompany profits or losses are eliminated. Consolidation transactions recognized in profit or loss are subject to the recognition of deferred taxes.

Investments in subsidiaries that are not consolidated because they are of minor significance are reported, to­ gether with other equity investments, under miscellaneous financial assets.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 63

4. Currency Translation

Transactions in foreign currencies are translated in the single­entity financial statements of VW FS AG and its consolidated subsidiaries at the rates prevailing at the transaction date. Foreign currency monetary items are reported in the balance sheet using the middle rate at the closing date and the resulting gains or losses are recognized in profit or loss. The foreign companies which form part of the VW FS AG Group are independent subunits whose financial statements are translated using the functional currency principle. Under this princi­ ple, assets and liabilities, but not equity, are translated at the closing rate. With the exception of income and expense items recognized in other comprehensive income, equity is translated at historical rates. Until the disposal of the subsidiary concerned, the resulting exchange differences on translating foreign operations are recognized in other comprehensive income and are presented as a separate item in equity. The transaction data in the statement of changes in noncurrent assets is translated into euros using weighted average rates. A separate “Foreign exchange differences” line is reported to reconcile the carryfor­ wards translated at the middle spot rate on the prior­year reporting date and the transaction data translated at average rates with the final balances translated at the middle spot rate on the reporting date. The income statement items are translated into euros using weighted average rates.

The following table shows the rates applied in currency translation:

BALANCE SHEET, INCOME STATEMENT, MIDDLE SPOT RATE ON DEC. 31 AVERAGE RATE

€1 = 2020 2019 2020 2019

Australia AUD 1.58605 1.60080 1.65529 1.61071 Brazil BRL 6.37555 4.51350 5.88850 4.41485 Denmark DKK 7.44050 7.47120 7.45439 7.46609 United Kingdom GBP 0.89925 0.84995 0.88904 0.87744 India INR 89.69000 80.15450 84.57106 78.86396 Japan JPY 126.51000 121.89500 121.77307 122.08649 Mexico MXN 24.41145 21.24340 24.51746 21.56326 Poland PLN 4.55615 4.25970 4.44376 4.29784 Republic of Korea KRW 1,336.21000 1,296.35000 1,345.14093 1,304.89265 Russia RUB 91.77540 69.84685 82.63583 72.46709 Sweden SEK 10.02470 10.44505 10.48882 10.58593 Czech Republic CZK 26.23900 25.40650 26.45443 25.66983 People’s Republic of China CNY 8.02895 7.81470 7.87025 7.73444

Volkswagen Financial Services AG | Annual Report 2020 64 Notes to the Consolidated Financial Statements Consolidated Financial Statements

5. Recognition of Revenue and Expenses

Revenue and expenses are recognized in accordance with the accrual basis of accounting and are reported in profit or loss in the period in which the substance of the related transaction occurs. Interest income is recognized in the income statement using the effective interest method. Income from fi­ nancing activities is included in the interest income from lending and securities transactions; leasing income is reported in the income statement under income from leasing transactions. The leasing revenue from operating lease contracts is recognized on a straight­line basis over the lease term. Contingent payments under finance leases and operating leases are recognized when the conditions for the contingent payments are satisfied. In the VW FS AG Group, contract origination costs are capitalized and amortized on a straight­line basis over the term of the contract only if the underlying contract has a term of at least one year and these costs would not have been incurred if the contract concerned had not materialized. Contract origination costs that would have arisen even if the relevant contract had not been signed are expensed as incurred. Expenses relating to the funding of financing and leasing transactions are reported in interest expenses. In the case of service contracts, such as maintenance or inspection agreements, revenue is recognized on ei­ ther a percentage­of­completion or straight­line basis, depending on the type of service performed. Percentage of completion is normally calculated by considering the services provided up to the reporting date as a propor­ tion of the total anticipated services (output­based). If the customer pays for services in advance, the Group recognizes a corresponding contractual liability until the relevant service is performed. Fee and commission income from brokering insurance contracts is recognized in accordance with contrac­ tual arrangements with the insurers when the entitlement arises, i.e. when the related premium is charged to the policyholder. Other fee and commission income for services at a particular point in time is recognized on the date of performance. In the case of services that are provided over a particular period of time, income is recognized at the reporting date according to the stage of completion. Fee and commission expenses arising from financing­business sales commission that are not included through the effective interest rate for the underlying financial assets are expensed in full on the date of perfor­ mance. Dividends are reported on the date on which the legal entitlement is established, i.e. generally the date on which a dividend distribution resolution is approved.

6. Income Taxes

Current income tax assets and liabilities are measured using the tax rates expected to apply in respect of the refund from or payment to the tax authorities concerned. Current income taxes are generally reported on an unnetted basis. Potential tax risks are recognized within the current tax liabilities item in the balance sheet. Deferred tax assets and liabilities are recognized in respect of temporary differences between the carrying amounts of assets and liabilities in the consolidated balance sheet and those in the tax base and in respect of tax loss carryforwards. This gives rise to expected income tax income or expense effects in the future (tempo­ rary differences). Deferred taxes are measured using the domicile­specific income tax rates expected to apply in the period in which the tax benefit is recovered or liability paid. Deferred tax assets are recognized if it is probable that in the future sufficient taxable profits will be gener­ ated in the same tax unit against which the deferred tax assets can be utilized. If it is no longer likely that it will be possible to recover deferred tax assets within a reasonable period, valuation allowances are applied. Deferred tax assets and liabilities with the same maturities and relating to the same tax authorities are net­ ted. The tax expense attributable to the profit before tax is reported in the Group’s income statement under the “Income tax expense” item and a breakdown into current and deferred taxes for the fiscal year is disclosed in the notes. Other non­income­related taxes are reported as a component of general and administrative expenses.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 65

7. Cash Reserve

The cash reserve is carried at the nominal amount.

8. Financial Instruments

Financial instruments are contracts that give rise to a financial asset of one entity and a financial liability or equity instrument of another entity. In the case of regular way purchases or sales, financial instruments are normally recognized on the settle­ ment date, i.e. the date on which the asset is delivered. An exception to this rule arises in connection with the accounting treatment of derivatives, which are always recognized on the trade date.

Financial assets are classified and measured on the basis of the business model operated by an entity and the structure of its cash flows.

IFRS 9 breaks down financial assets into the following categories: > financial assets measured at fair value through profit or loss, > financial assets measured at fair value through other comprehensive income (debt instruments), > financial assets measured at fair value through other comprehensive income (equity instruments), and > financial assets measured at amortized cost.

Financial liabilities are classified using the following categories: > financial liabilities measured at fair value through profit or loss, and > financial liabilities measured at amortized cost.

In the VW FS AG Group, the categories shown above are allocated to the classes “financial assets and liabilities measured at amortized cost” and “financial assets and liabilities measured at fair value”. The fair value option for financial assets and financial liabilities is not applied in the VW FS AG Group. Financial assets and financial liabilities are generally reported with their unnetted gross values. Offsetting is only applied if, at the present time, the offsetting of the amounts is legally enforceable by the VW FS AG Group and there is an intention to settle on a net basis in practice.

FINANCIAL ASSETS MEA SURED AT AMORTIZED COST AND FINANCIAL LI ABILITIES MEASURED AT AMORTIZED COST CAT­ EGORIES Financial assets measured at amortized cost are held within a business model whose objective is to hold finan­ cial assets in order to collect contractual cash flows (“hold to collect” business model). The contractual cash flows of these financial assets consist solely of payments of principal and interest on the principal amount outstanding, such that the cash flow criterion is satisfied. Financial liabilities are measured at amortized cost unless these liabilities are derivatives. The amortized cost of a financial asset or financial liability is the amount:

> at which the financial asset or financial liability is measured on initial recognition, > minus any repayments of principal, > adjusted, in the case of financial assets, for any recognized valuation allowances, impairment losses due to uncollectibility, and > plus or minus the cumulative amortization of any difference between the initial amount and the maturity amount (premium, discount) using the effective interest method.

Gains and losses arising from the changes in amortized cost are recognized in profit or loss, including the ef­ fects from changes in exchange rates.

Volkswagen Financial Services AG | Annual Report 2020 66 Notes to the Consolidated Financial Statements Consolidated Financial Statements

FINANCIAL ASSETS MEA SURED AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (DEBT IN STRUMENTS) CATE­ GORY Financial assets (debt instruments) measured at fair value through other comprehensive income are held with­ in a business model whose objective is to collect contractual cash flows and sell financial assets (“to collect and sell” business model). The contractual cash flows of these financial assets consist solely of payments of princi­ pal and interest on the principal amount outstanding. Changes in fair value that extend beyond the changes in the amortized cost of these financial assets are rec­ ognized in other comprehensive income (taking into account deferred taxes) until the financial asset con­ cerned is derecognized. Only then are the accumulated gains or losses reclassified to profit or loss. The changes in amortized cost, such as impairment losses, interest determined in accordance with the ef­ fective interest method and foreign currency gains or losses, are immediately recognized in profit or loss.

FINANCIAL ASSETS MEA SU RE D AT FAIR VALUE THROUGH P ROFIT OR LOSS AND FI NANCIAL LIABILITIES MEASURED AT FAIR VALUE THROUGH P ROFIT OR LOSS CATEGO RIES Financial assets (debt instruments) for which the cash flow criterion is not satisfied, or that are managed within a business model that aims to sell these assets in order to realize cash flows (“sell” business model), together with derivatives, are measured at fair value through profit or loss. The same applies to financial liabilities that are not measured at amortized cost. In the case of these financial assets and liabilities, any changes in fair value are recognized in profit or loss.

FINANCIAL ASSETS MEA SURED AT FAIR VALUE THROUGH OTHER COMPRE HENSIVE INCOME (EQUI TY INSTRUMENTS) CATEGORY In the VW FS AG Group, financial assets that represent an equity instrument are measured at fair value through other comprehensive income in exercise of the fair­value­through­OCI option unless they are held for trading purposes. The accumulated gains or losses from remeasurement are transferred on derecognition to retained earnings and not to the income statement (i.e. they are not reclassified to profit or loss).

LOANS AND RECEIVABLE S Loans to and receivables from banks, and loans to and receivables from customers, originated by the VW FS AG Group are generally recognized at amortized cost using the effective interest method. Gains or losses arising from the changes in amortized cost are recognized in profit or loss, including the effects from changes in exchange rates. In individual cases, some loans to and receivables from customers are recognized at fair value through prof­ it or loss because the cash flow criterion is not satisfied. Gains and losses arising from changes in fair value are recognized in profit or loss under net gain or loss on financial instruments measured at fair value. For reasons of materiality, non­interest­bearing current loans and receivables (due within one year) are not discounted and therefore no unwinding of discount is recognized. Some of the loans to and receivables from customers are included in portfolio hedges. For reasons of mate­ riality, the fair value adjustment from portfolio hedging of loans to and receivables from customers is not re­ ported as a separate asset in the balance sheet. Instead, the customer loans and receivables assigned to portfolio hedging are reported at the hedged fair value within the loans to and receivables from customers item in the balance sheet. The amount of the fair value adjustments is presented in the notes within the disclosures relat­ ing to the loans to and receivables from customers. Loans and receivables are derecognized when they are repaid or settled. There are no indications of derecogni­ tion for loans/receivables from ABS transactions carried out by the Group.

MARKETABLE SECURITIE S The “Marketable securities” balance sheet item largely comprises of investments of resources in the form of fixed­income securities from public­ and private­sector issuers as well as investment fund shares/units within the framework specified by the investment policy issued by Volkswagen Versicherung AG. The fixed­income securities are allocated to the category of financial assets (debt instruments) measured at fair value through other comprehensive income. Valuation allowances for fixed­income securities are recog­ nized in profit or loss under the “Provision for credit risks” line item. Interest determined in accordance with the effective interest method and effects from changes in exchange rates are also recognized in profit or loss. In

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 67

addition, the differences between the amortized cost and fair value arising from the remeasurement of fixed­ income securities are recognized in other comprehensive income, taking into account deferred taxes. Shares/units in investment funds are allocated to the category of financial assets measured at fair value through profit or loss. Gains and losses arising from the remeasurement of shares/units in investment funds are recognized in profit or loss under gains and losses on financial instruments measured at fair value.

E Q U I T Y I NVESTMENTS The equity investments included in the “Miscellaneous financial assets” balance sheet item are measured as equity instruments generally at fair value through other comprehensive income in exercise of the fair­value­ through­OCI option. As the equity investments are strategic financial investments, this classification provides a more meaningful presentation of the investments. If, in the case of non­material equity investments, there is no active market and there is no evidence that the fair values are significantly different from cost, such equity investments are accounted for at cost and re­ ported under financial assets measured at fair value.

DERIVATIVE FINANCIAL INSTRUMENTS AND HED GE ACCOUNTING Derivative financial instruments comprise derivatives in effective hedges and derivatives not designated as hedging instruments. All derivatives are measured at fair value and are presented separately in notes (34) and (45). The fair value is determined with the help of measurement software in IT systems using the discounted cash flow method and taking into account credit value adjustments and debt value adjustments. In the VW FS AG Group, entities enter into derivative transactions solely for hedging purposes as part of the management of interest rate and/or currency risk. Derivatives are used as hedging instruments to hedge fair values or future cash flows (referred to as hedged items). Hedge accounting in accordance with IFRS 9 is only applied in the case of hedges that can be demon­ strated to be effective, both on designation and continuously thereafter. The VW FS AG Group documents all relationships between hedging instruments and hedged items. When fair value hedges are applied, changes in the fair value of the derivative designated as the instrument used to hedge the fair value of a recognized asset or liability (hedged item) are recognized in profit or loss under net gain or loss on hedges. Changes in the fair value of the hedged item in connection with which the risk is being minimized are also reported in profit or loss under the same item. The effects in profit or loss from the changes in the fair value of the hedging instrument and the hedged item balance each other out depending on the extent of hedge effectiveness. Gains or losses arising from the ineffectiveness of fair value hedges are also recognized in gain or loss on hedges. IFRS 9 allows entities to apply the provisions of IAS 39 to the hedging of the fair value of a portfolio of fi­ nancial assets or financial liabilities (portfolio hedge accounting). In the reporting period, the VW FS AG Group used portfolio­based fair value hedges to hedge interest­rate risks and accounted for these hedges in accordance with the requirements of IAS 39. In portfolio­based hedging, the accounting treatment of changes in fair value is the same as in fair value hedging at micro level. In the case of derivatives that are designated as hedges of future cash flows and that satisfy the relevant criteria, the changes in the fair value of the derivative are recognized in separate items of other comprehensive income. The designated effective portion is recognized within other comprehensive income in OCI I. For non­designated forward components of currency forwards, the effective portion is determined on the basis of an aligned value test and reported within other comprehensive income in OCI II. Effects on profit or loss under net gain or loss on hedges arise from the ineffective portion of the change in fair value as well as from the reclassification (on recognition of the hedged item) of changes in fair value previously recognized in other comprehensive income. The measurement of the hedged item remains unchanged. Changes in the fair values of derivatives that do not satisfy the IFRS 9 criteria for hedge accounting and are therefore accounted for in the category of financial assets and financial liabilities measured at fair value through profit or loss are recognized in profit or loss under net gain or loss on financial instruments measured at fair value. Fair values are also reported for derivatives arising from early termination rights in the form of derivatives embedded in finance leases.

Volkswagen Financial Services AG | Annual Report 2020 68 Notes to the Consolidated Financial Statements Consolidated Financial Statements

PROVISION FOR CREDIT RISKS The provision for credit risks, which is recognized in accordance with the expected credit loss model specified by IFRS 9 and in accordance with uniform standards applied throughout the Group, encompasses all financial assets measured at amortized cost, financial assets in the form of debt instruments measured at fair value through other comprehensive income, lease receivables that fall within the scope of IFRS 16 and credit risks from off­balance­sheet irrevocable credit commitments and financial guarantees. The provision for credit risks calculation generally takes into account the exposure at default, the probability of default and the loss given default. Financial assets are subject to credit risks, which are taken into account by recognizing valuation allowances in the amount of the expected loss; such valuation allowances are recognized for both financial assets with objective evidence of impairment and non­impaired financial assets. These allowances are posted to separate valuation allowance accounts. The general approach is used for financial assets measured at amortized cost (with the exception of trade receivables), financial assets (debt instruments) whose changes in fair value are recognized in other compre­ hensive income and for irrevocable credit commitments and financial guarantees unless there is already objec­ tive evidence of impairment on initial recognition. Financial assets are broken down into three stages in the general approach. Stage 1 consists of financial assets that are being recognized for the first time or that have not demonstrated any significant increase in default risk since initial recognition. In this stage, the model re­ quires the calculation of an expected credit loss for the next 12 months. Stage 2 consists of financial assets for which the risk of default has increased significantly since initial recognition. Financial assets demonstrating objective indications of impairment are allocated to Stage 3. In Stages 2 and 3, an expected credit loss is calcu­ lated for the entire remaining maturity of the asset. In the case of financial assets already impaired on initial recognition and classified as Stage 4 for the pur­ poses of the disclosures, the provision for credit risks is recognized in subsequent measurement on the basis of the cumulative changes in the expected credit loss for the entire life of the asset concerned. Any financial in­ strument classified as impaired on initial recognition remains in this stage until it is derecognized. The provision for credit risks is calculated on the basis of the individual financial asset. The parameters re­ quired for this calculation are established by assessing portfolios in which individual financial assets of a simi­ lar type are brought together. Such homogeneous portfolios are created, for example, on the basis of customer group (e.g. dealer), product (e.g. financing or leasing), or type of collateral (e.g. vehicle). In the case of significant financial assets (e.g. dealer financing loans/receivables and fleet customer business loans/receivables) with objective evidence of impairment, the measurement parameters are determined on the basis of the individual contract. In the VW FS AG Group, the provision for credit risks relating to trade receivables and to operating and fi­ nance lease receivables accounted for in accordance with IFRS 16 is uniformly determined using the simplified approach. In the simplified approach, an expected loss is calculated for the entire remaining maturity of the asset. The valuation allowance for trade receivables is calculated according to the extent the receivable is past due using a valuation allowance table (provision matrix). Both historical information, such as average historical default probabilities for each portfolio, and forward­ looking information, such as macroeconomic factors and trends (e.g. rate of change for gross domestic product, unemployment rate), linked to expected credit losses, are used to determine the measurement parameters for calculating the provision for credit risks. To model the measurement parameters, calculations are carried out for various probability­weighted scenarios using region­specific macroeconomic factors. The calculation to determine whether the credit risk has increased significantly at the reporting date gener­ ally takes into account the maturity of the agreement. The credit risk expected for the reporting date on the date of initial recognition is compared against the actual credit risk on the reporting date on the basis of the 12­ month probability of default. For the purposes of the comparison, the expected probability of default for the reporting date is determined by taking into account the maturity. Depending on the internal risk management models applied, threshold values are specified for expected credit risk using statistical methods and expert assessments, taking into account transaction­specific variables (such as maturity, payment record and credit process). A credit risk higher than the threshold value indicates a significant increase in credit risk. Depending on specific regional circumstances, qualitative factors may also be used to determine a significant increase in credit risk. This includes the addition of contracts to a watchlist for customers with loans subject to intensified loan management. Generally speaking, credit risk is assumed to have increased significantly, at the latest, if

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 69

payments are past due by more than 30 days unless the financial assets have already been allocated to Stage 3 because of other objective evidence of impairment or, as a consequence of a substantial contractual modifica­ tion, they are added to Stage 1 again at the reporting date despite payments being past due. A financial asset for which the credit risk is determined to be very low at the reporting date can normally be allocated to Stage 1. In the VW FS AG Group, a very low credit risk can be assumed if the financial asset is classi­ fied as investment grade. According to the definition of default used by the VW FS AG Group, there is deemed to be objective evidence of impairment if a number of situations arise, such as payment delayed by more than 90 days, the initiation of enforcement measures, the threat of insolvency or over­indebtedness, application for or the initiation of insol­ vency proceedings, or the failure of restructuring measures. Reviews are regularly carried out to ensure the valuation allowances are appropriate. Uncollectible loans or receivables that are already subject to a remediation for which all collateral has been recovered and all further options for recovering the loan or receivable have been exhausted are written off directly. Any valuation allowances previously recognized are utilized. Income subsequently collected in connec­ tion with loans or receivables already written off are recognized in profit and loss. Loans and receivables are reported in the balance sheet at the net carrying amount. The provision for credit risks relating to off­balance sheet irrevocable credit commitments and financial guarantees is recognized with­ in other liabilities. Disclosures relating to the provision for credit risks are presented separately in note (59).

LIABILITIES Liabilities to banks and customers (note 42), notes and commercial paper issued (note 43), and subordinated capital liabilities (note 50) are recognized at amortized cost using the effective interest method. Gains or losses arising from the changes in amortized cost are recognized in profit or loss, including the effects from changes in exchange rates. For reasons of materiality, discounting or unwinding of discounting is not applied to non­interest­bearing current liabilities (due within one year). They are therefore recognized at their repayment or settlement value.

Volkswagen Financial Services AG | Annual Report 2020 70 Notes to the Consolidated Financial Statements Consolidated Financial Statements

9. Miscellaneous Financial Assets

Investments in subsidiaries that are not consolidated and other equity investments are reported as miscellane­ ous financial assets. Investments in unconsolidated subsidiaries are recognized at cost taking into account any necessary im­ pairment losses. Impairment losses are recognized in profit or loss if there are country­specific indications of significant or permanent impairment (e.g. imminent payment difficulties or economic crises). Subsidiaries or joint ventures not consolidated for reasons of materiality do not fall within the scope of IFRS 9 and are there­ fore not included in the disclosures required by IFRS 7. The accounting policies applicable to equity investments are set out in note (8) Financial Instruments.

10. Intangible Assets

Purchased intangible assets are recognized at cost and – provided they have a finite useful life – amortized on a straight­line basis over their useful lives. These assets mainly consist of software, which is generally amortized over three or five years. Research costs are not capitalized. Subject to the conditions specified in IAS 38, internally developed software and all the direct and indirect costs that are directly attributable to the development process are capitalized. When assessing whether the development costs associated with internally generated software are to be capitalized or not, VW FS AG takes into account not only the probability of a future inflow of economic benefits but also the extent to which the costs can be reliably determined. Amortization is on a straight­line basis over the useful life of three to five years and is reported under general and administrative expenses. If one or more of the criteria for capitaliza­ tion are not satisfied, the costs are expensed in the year they are incurred. At every reporting date, intangible assets with finite useful lives are tested to establish whether there are any indications of impairment. An appropriate impairment loss is recognized if a comparison shows that the re­ coverable amount for the asset is lower than its carrying amount. Intangible assets with indefinite useful lives are not amortized. An annual review is carried out to establish whether an asset has an indefinite useful life. In accordance with IAS 36, these assets are tested for impairment by comparing the carrying amount and recoverable amount at least once a year and additionally if relevant events or changes in circumstances should occur. If required, an impairment loss is recognized to reduce the carrying amount to a lower recoverable amount (see note 12). Goodwill is tested for impairment once a year and also if relevant events or changes in circumstances occur. If the carrying amount of goodwill is higher than the recoverable amount, an impairment loss is recognized. There can be no subsequent reversal of such impairment losses. The recoverable amount of goodwill is derived from the value in use for the relevant cash­generating unit, which is determined using the discounted cash flow method. The basis is the latest planning data prepared by management for a planning period of five years, with growth in subsequent years estimated using a flat rate percentage. This planning is based on expectations regarding future global economic trends, trends in the overall markets for passenger cars and commercial vehicles and on assumptions derived from these trends about financial services, taking into account market penetration, risk costs and margins. Planning assumptions are adjusted in line with the latest available information. The interest rate used is based on the long­term mar­ ket interest rate relevant to each cash­generating unit (regions or markets). If necessary, the standard cost of equity rate for the Group is also adjusted using discount factors specific to the country and business concerned. The interest rates used are disclosed in note 36. The calculation of cash flows is based on the forecast growth rates for the relevant markets. Cash flows after the end of the planning period are generally estimated using a growth rate of 1% p.a. (previous year: 1% p.a.).

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11. Property and Equipment

Property and equipment (land and buildings plus operating and office equipment) is reported at cost less de­ preciation and, if necessary, any impairment losses. Depreciation is applied on a straight­line basis over the estimated useful life. Useful lives are reviewed at every reporting date and adjusted where appropriate.

Depreciation is based mainly on the following useful lives:

Property and equipment Useful lives

Buildings and property facilities 10 to 50 years Operating and office equipment 3 to 15 years

An impairment loss is recognized in accordance with IAS 36 if the recoverable amount of the asset concerned has fallen below its carrying value (see note 12). Depreciation expense and impairment losses are reported within general and administrative expenses. In­ come from the reversal of impairment losses is recognized in net other operating income/expenses. The property and equipment line item on the balance sheet also includes right­of­use assets in connection with leases in which the VW FS AG Group is the lessee. The accounting policies for these right­of­use assets are set out in note (13) Leases within the subsection covering the Group as lessee.

12. Impairment of Non­Financial Assets

Assets with an indefinite useful life are not depreciated or amortized; they are tested for impairment once a year and additionally if relevant events or changes in circumstances occur. Assets subject to depreciation and amortization are tested for impairment if relevant events or changes in circumstances indicate that the recov­ erable amount of the asset concerned is lower than its carrying amount. An impairment loss is recognized when the carrying amount exceeds the recoverable amount. The recover­ able amount is the higher of fair value less costs to sell and fair value less value in use. Fair value is the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties. The value in use is defined as the net present value of future cash flows expected to be derived from the asset. If the reasons for the recognition of an impairment loss in prior years now no longer apply, an appropriate reversal of the impairment loss is recognized. This does not apply to impairment losses recognized in respect of goodwill.

13. Leases

The VW FS AG Group accounts for leases in accordance with IFRS 16. This standard defines a lease as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in ex­ change for consideration.

GROUP AS LESSOR The VW FS AG Group operates both finance lease and operating lease business. The leases are mainly vehicle leases, but to a lesser extent also involve land, buildings and dealer equipment. The accounting treatment of a lease is based on whether the lease is classified as a finance lease or an operating lease. The classification is determined according to the distribution of the risks and rewards associated with ownership of the leased asset. A finance lease is a lease that transfers substantial risks and rewards to the lessee. Where residual value guarantees are agreed, residual value risks are passed to the residual value guarantor. In the consolidated bal­

Volkswagen Financial Services AG | Annual Report 2020 72 Notes to the Consolidated Financial Statements Consolidated Financial Statements

ance sheet, receivables from finance leases are reported within loans to and receivables from customers and the net investment in the lease generally equates to the cost of the lease asset. Interest income from these transac­ tions is reported under leasing income in the income statement. The interest paid by the customer is allocated so as to produce a constant periodic rate of interest on the remaining balance of the lease receivable. In the case of operating leases, the substantial risks and rewards related to the leased asset remain with the lessor. In this case, the assets involved are reported in a separate “Lease assets” item in the consolidated balance sheet, measured at cost and reduced by straight­line depreciation over the lease term to the calculated residual carrying amount. Any impairment identified as a result of an impairment test in accordance with IAS 36 in which the recoverable amount (normally the value in use) is found to have fallen below the carrying amount is taken into account by recognizing an impairment loss. Generally, future depreciation rates are adjusted as a consequence of impairment. If the reasons for the recognition of an impairment loss in prior years no longer apply, a reversal of the impairment loss is recognized. Impairment losses and reversals of impairment losses are included in the net income from leasing transactions. The leasing revenue is recognized on a straight­line basis over the lease term. Where the VW FS AG Group is a lessor, one of the ways in which it counters the risks arising in connection with the underlying leased assets (mainly vehicles) is to take into account residual value guarantees received for parts of the lease portfolio and to include residual value forecasts on the basis of internal and external infor­ mation within residual value management. Residual value forecasts are regularly verified by a process of backtesting. The VW FS AG Group takes full account of the credit risk arising in connection with lease receivables by rec­ ognizing loss allowances in accordance with the provisions specified in IFRS 9. The accounting policies covering loss allowances for the credit risk on lease receivables are included in note (8) Financial Instruments in the subsection addressing the provision for credit risks.

GROUP AS LESSEE Where the VW FS AG Group is a party to leases as a lessee, the Group generally recognizes a right­of­use asset and a lease liability in its balance sheet. At the VW FS AG Group, the lease liability is measured at the present value of the outstanding lease payments, whereas the right­of­use asset is generally measured at the amount of the lease liability plus any direct costs. The right­of­use asset is depreciated on a straight­line basis over the term of the lease. The depreciation expense is reported under general and administrative expenses. The allocation of the depreciation amounts for right­of­ use assets to the categories “Right of use on land, land rights and buildings incl. buildings on third party land” and “Right of use on other equipment, operational and office equipment” is shown in note (64) Leases. In the subsequent measurement of the lease liability, the carrying amount is updated using the effective interest method and taking into account the lease payments made. The interest expenses arising from the application of the effective interest method are reported under interest expenses in the income statement. The right­of­use assets recognized in the balance sheet are reported under those line items in which the lease’s underlying assets would have been reported if these assets had been in the beneficial ownership of the VW FS AG Group. The right­of­use assets are therefore reported as of the reporting date under property and equipment and lease assets and included in the impairment tests for property and equipment carried out in accordance with the requirements of IAS 36. Lease liabilities are carried at the present value of the lease payments. Exemptions are provided for short­term leases and leases in which the underlying asset is of low value. The VW FS AG Group has elected to apply these exemptions and therefore does not recognize any right­of­use asset or lease liability for such leases. The associated lease payments are recognized as an expense under general and administrative expenses in the income statement. A lease is treated as a lease in which the underlying asset is of low value if the value of the underlying asset when new is no more than €5,000. The accounting require­ ments specified in IFRS 16 are not applied to leases for intangible assets either. Leases may include extension or termination options. When determining the lease term, all relevant facts and circumstances that create an economic incentive for the lessee to exercise an option to extend the lease, or not to exercise an option to terminate the lease, must be taken into account. Periods covered by options are taken into account when determining the lease term if the lessee is reasonably certain to exercise an option to extend the lease or reasonably certain not to exercise an option to terminate the lease.

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BUYBACK TRANSACTIONS Leases in which the VW FS AG Group has a firm agreement with the seller of the lease asset regarding the return of the lease asset are recognized under other loans and receivables within loans to and receivables from cus­ tomers at the amount of the resale value agreed at the inception of the lease and are also recognized in the amount equating to the right of use under lease assets (in the case of long­term (noncurrent) leases) or under other assets (in the case of short­term leases). In the case of noncurrent leases (maturity of more than one year), the agreed resale value is discounted at the inception of the lease. The unwinding of the discount during the term of the lease is recognized in interest income. The value of the right of use recognized under other assets is depreciated on a straight­line basis over the term of the lease. This depreciation is reported under depreciation, impairment losses and other expenses from leasing transactions. Lease payments received under subleases are reported as income from leasing business.

14. Investment Property

Land and buildings held to earn rentals are reported under the “Investment property” item in the balance sheet and measured at amortized cost. The land and buildings involved are generally leased out to dealer businesses. The fair values disclosed in the notes are determined by the relevant entity by discounting the estimated future cash flows using the relevant long­term market discount rate. Depreciation is applied on a straight­line basis over useful lives of ten to 33 years. Any impairment identified as a result of an impairment test in accordance with IAS 36 is taken into account by recognizing an impairment loss.

15. Provisions for Pensions and Other Post­Employment Benefits

Provisions are recognized for commitments in the form of retirement, invalidity and surviving dependants’ benefits payable under pension plans. The benefits provided by the Group vary according to the legal, tax and economic circumstances of the country concerned, and usually depend on the length of service and remunera­ tion of the employees. The VW FS AG Group provides occupational pensions in the form of both defined contribution and defined benefit plans. In the case of defined contribution plans, the Company makes contributions to state or private pension schemes based on statutory or contractual requirements, or on a voluntary basis. Once the contribu­ tions have been paid, the VW FS AG Group has no further obligations. In 2020, the total contributions made by the VW FS AG Group came to €46 million (previous year: €46 million). Contributions to the compulsory state pension system in Germany amounted to €37 million (previous year: €37 million).

Pension schemes in the VW FS AG Group are predominantly defined benefit plans in which there is a distinc­ tion between pensions funded by provisions (without plan assets) and externally funded plans (with plan as­ sets). The pension provisions for defined benefit commitments are measured by independent actuaries using the internationally accepted projected unit credit method in accordance with IAS 19. This means that the future obligations are measured on the basis of the proportionate benefit entitlements earned as of the reporting date. The measurement of pension provisions takes into account actuarial assumptions regarding discount rates, salary and pension trends, life expectancy and employee turnover rates, which are determined for each Group company depending on the economic environment. Actuarial gains or losses arise from differences between actual trends and prior­year assumptions as well as from changes in assumptions. These gains and losses are recognized in the period in which they arise in other comprehensive income (taking into account deferred taxes) and have no impact on profit or loss. Detailed disclosures on provisions for pensions and other post­employment benefits are set out in note (46).

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16. Insurance Business Provisions

Inward reinsurance and direct insurance operations are accounted for in the period in which the reinsurance or insurance arises without any time delay. Insurance contracts are accounted for in accordance with IFRS 4 and, to the extent permitted by local ac­ counting regulations, also in accordance with sections 341ff. of the HGB and the Verordnung über die Rech­ nungslegung von Versicherungsunternehmen (RechVersV – German Accounting Regulation for Insurance Companies). Unearned premiums for direct insurance business are generally determined on the basis of each individual contract using the 1/act method. Provisions for claims outstanding in direct insurance operations are normally determined and measured on the basis of each claim in accordance with the estimated requirement. The chain ladder method or modified chain ladder method is generally used to determine the provision for incurred but not reported (IBNR) losses. The partial loss provision for claims settlement expenses is calculated in accordance with the requirements set out in the coordinated regulations issued by the German federal states on February 2, 1973. The provision for performance­related and non­performance­related premium refunds contains only obli­ gations in connection with non­performance related refunds and is estimated on the basis of contract­specific claims experience. The other underwriting provisions include the cancellation provision for direct repair costs insurance busi­ ness on the basis of premium receivables and amounts already received, and otherwise generally on the basis of historical cancellation rates. An equalization provision was not recognized because it is prohibited under IFRS 4. The reinsurers’ share of provisions is calculated in accordance with the contractual agreements with the ret­ rocessionaires and reported under other assets. Provisions for outstanding claims in inward reinsurance business are generally recognized on the basis of the information provided by the cedants. Actuarial methods and systems that guarantee ongoing monitoring and control of all key insurance risks are used to ensure that the level of underwriting provisions is adequate. One of the main features of the insur­ ance business is underwriting risk, which comprises primarily premium/loss risk, reserve risk, cancellation risk and catastrophe risk. The VW FS AG Group counters these risks by constantly monitoring the basis of computa­ tions, making appropriate additions to provisions and applying a restrictive underwriting policy.

17. Other Provisions

Under IAS 37, provisions are recognized if a present legal or constructive obligation to a third party has arisen as a result of a past event, it is probable that settlement in the future will result in an outflow of resources em­ bodying economic benefits and the amount of the obligation can be estimated reliably. If an outflow of re­ sources is neither probable nor improbable, the amount concerned is deemed to be a contingent liability. In accordance with IAS 37, this contingent liability is not recognized but disclosed in note (66). The share­based payment within other provisions and within other liabilities includes performance shares based on Volkswagen AG preferred shares. The commitments in relation to share­based payments are account­ ed for as cash­settled plans in accordance with IFRS 2. These cash­settled plans are measured during the term to maturity at fair value, which is determined by using a recognized option pricing model. The total remuneration expense to be recognized equates to the actual payout and is allocated over the vesting period. The remunera­ tion expense is treated as part of personnel expenses within general and administrative expenses reported in the income statement. Provisions for litigation and legal risks are recognized and measured using assumptions about the probabil­ ity of an unfavorable outcome and the amount of possible utilization. Income from the reversal of other provisions is generally recognized in the income statement item or net income item in which the associated expense was recognized in previous fiscal years. Provisions not related to an outflow of resources likely to take place in the subsequent year are recognized at their settlement amount discounted to the reporting date using market discount rates. An average discount

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rate of –0.2% (previous year: –0.1%) has been used for the eurozone. The settlement amount also includes ex­ pected cost increases. Any rights of recourse are not offset against provisions.

18. Estimates and Assumptions by Management

The preparation of the consolidated financial statements requires management to make certain estimates and assumptions that affect the recognition and measurement of assets, liabilities, income and expenses, and dis­ closures relating to contingent assets and liabilities for the reporting period. Assumptions and estimates are based on the latest available information. The circumstances prevailing at the time the consolidated financial statements are prepared and future trends in the global and sector envi­ ronment considered to be realistic are taken into account in the projected future performance of the business. The estimates and assumptions used by management have been made, in particular, on the basis of assump­ tions relating to macroeconomic trends as well as trends in automotive markets, financial markets and the legal framework. These and other assumptions are explained in detail in the report on expected developments, which is part of the management report. As future business performance is subject to unknown factors that, in part, lie outside the control of the Group, assumptions and estimates continue to be subject to considerable uncertainty. If changes in parameters are different from the assumptions and beyond any influence that can be exercised by management, the amounts actually arising could differ from the estimated values originally forecast. If actual performance varies with the forecasts, the assumptions and, where necessary, the carrying amounts of the assets and liabilities concerned are adjusted accordingly. Please refer to the separate section within Significant Events for further information on estimation uncer­ tainty arising from the effects of Covid­19 pandemic. The assumptions and estimates largely relate to the items set out below.

RECOVERABLE AMOUNT O F LEASE ASSETS The recoverable amount of leased assets in the Group mainly depends on the residual value of the leased vehi­ cles when the leases expire because this value represents a considerable proportion of the expected cash in­ flows. Continuously updated internal and external information on trends in residual values – based on particu­ lar local circumstances and empirical values from the marketing of used vehicles – is factored into the forecasts of residual values for leased vehicles. These forecasts require the Group to make assumptions, primarily in relation to future supply and demand for vehicles and in relation to trends in vehicle prices. These assumptions are based on either professional estimates or information published by third­party experts. The professional estimates are based on external data (where available), taking into account any additional information available internally, such as values from past experience and current sales data. Forecasts and assumptions are regularly verified by a process of backtesting.

LEASE TERM IN LESSEE ACCOUNTING Under IFRS 16, the term of a lease is determined on the basis of the fundamental non­cancelable term of the lease plus an assessment of whether any option to extend the lease will be exercised or whether any option to terminate the lease will not be exercised. The lease term determined in this way and the discount rates used affect the amounts recognized for the right­of­use assets and the lease liabilities.

FINANCIAL INSTRUMENT S The procedure for determining the recoverability of financial assets requires estimates about the extent and probability of occurrence of future events. These estimates take into account the latest market data as well as rating classes and scoring information based on experience combined with forward­looking parameters. Fur­ ther information on determining valuation allowances can be found in the disclosures on the provision for credit risks (note 8). Management estimates are necessary to determine the fair value of financial instruments. This relates to both fair value as a measurement standard in the balance sheet and fair value in the context of disclosures in the notes. Fair value measurements are categorized into a three­level hierarchy depending on the type of inputs

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used in the valuation technique and each level requires different management estimates. Fair values in Level 1 are based on prices quoted in active markets. Management assessments in this case relate to determining the primary or most advantageous market. Level 2 fair values are measured on the basis of observable market data using market­based valuation techniques. Management decisions for this level relate to selecting generally accepted, standard industry models and specifying the market in which the relevant input factors are observa­ ble. Level 3 fair values are determined with recognized valuation techniques relying on some inputs that cannot be observed in an active market. Management judgment is required in this case when selecting the valuation techniques and determining the inputs to be used. These inputs are developed using the best available infor­ mation. If the Company uses its own data, it applies appropriate adjustments to best reflect market conditions.

INCOME FROM SERVICE CONTRACTS The calculation of contractual service rates in service contracts is subject to assumptions about expenses dur­ ing the term of contracts; these assumptions are based on past experience. The parameters used in the calcula­ tion of contractual service rates are regularly reviewed. During the term of contracts, income from service con­ tracts is recognized on the basis of expenses incurred, plus a margin derived from the contractual service rates.

PROVISIONS The recognition and measurement of provisions is also based on assumptions about the probability that future events will occur and the amounts involved, together with an estimation of the discount rate. Again, experience or reports from external experts are used as much as possible. The measurement of pension provisions is based on actuarial assumptions regarding discount rates, salary and pension trends, and employee turnover rates, which are determined for each group company depending on the economic environment. In the case of other provisions, expected values are used as the basis for measurement, which means that changes are made on a regular basis, involving either additions to the provisions or the reversal of unused provisions. Changes in the estimates of the amounts for other provisions are always recognized in profit or loss. The recognition and measurement of provisions for litigation and legal risks included within other provisions requires predictions with regard to decisions to be made by the courts and the outcome of legal proceedings. Each case is individually assessed on its merits based on developments in the proceedings, the company’s past experience in comparable situations and evaluations made by experts and lawyers.

RECOVERABLE AMOUNT O F NO N­FINANCIAL ASSE TS, JOINT VENTURES A ND EQUITY INVESTMENT S The impairment tests applied to non­financial assets (particularly goodwill and brand names), equity­ accounted joint ventures and equity investments measured at cost require assumptions related to the future cash flows in the planning period and, where applicable, beyond. The assumptions about the future cash flows factor in expectations regarding future global economic trends, trends in the overall markets for passenger cars and commercial vehicles and expectations derived from these trends about financial services, taking into ac­ count market penetration, risk costs, margins and regulatory requirements. For further information on the assumptions relating to the detailed planning period, please refer to the report on expected developments, which forms part of the management report. The discount rates used in the discounted cash flow method ap­ plied when testing goodwill for impairment are based on specified cost of equity rates, taking into account historical experience and appropriate assumptions regarding macroeconomic trends. In particular the fore­ casts for short­ and medium­term cash flows, and the discount rates used, are subject to uncertainty outside the control of the group.

DEFERRED TAX ASSETS AND UNCERTAIN INCOME TA X I T E MS When determining deferred tax assets, there is a need to make assumptions about future taxable income and the timings for any recovery of the deferred tax assets. The measurement of deferred tax assets for tax loss carryforwards is generally based on future taxable income within a planning horizon of five fiscal years. Tax liabilities are recognized for potential retrospective tax payments in the future; other liabilities are rec­ ognized for any additional tax costs incurred in this regard. The entities in the VW FS AG Group operate worldwide and are audited on an ongoing basis by the local tax authorities. Changes to tax legislation, decisions by the courts and their interpretation by the tax authorities in

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the countries concerned could give rise to tax payments that are different from the estimates made in the fi­ nancial statements. The assessment of uncertain tax exposures is based on the most likely figure if the risk were to materialize. The VW FS AG Group makes a decision on a case­by­case basis as to whether to account for several tax uncer­ tainties individually or in groups, depending on which approach better serves to predict whether the tax risk will materialize. The pricing of individual services is particularly complex in contracts for cross­border intragroup services because, in many cases, there are no observable market prices or the application of market prices for similar services is subject to some uncertainty because the services are not comparable. In such cases – and for tax purposes – the pricing is determined using uniform measurement methods applied in generally accepted busi­ ness practice. Actual figures may differ from the original estimates if the circumstances differ from the assumptions made in the estimates.

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Income Statement Disclosures

19. Interest Expense

Interest expenses include funding expenses for lending and leasing business. The net expense arising from interest income and expenses in the reporting period on derivatives not designated as hedging instruments amounts to €8 million (previous year: €19 million). The disclosures relating to the interest expenses for lease liabilities reported under the interest expenses line item in the income statement can be found in note (64) Leases.

20. Net Income from Service Contracts

Of the total income recognized for service contracts, an amount of €1,630 million (previous year: €1,350 million) related to service contracts requiring the recognition of income at a specific time, and €470 million (previous year: €388 million) related to service contracts requiring the recognition of income over a period of time. Of the income from service contracts recognized in the reporting period, income of €608 million had been included in the contractual liabilities for service contracts as of January 1, 2020. Of the income recognized in the prior year, income of €442 million had been included in the contractual liabilities for service contracts as of January 1, 2019.

21. Net Income from Insurance Business

The following table shows the net income from insurance business:

€ million 2020 2019

Insurance premiums earned 345 318 Insurance claims expenses –121 –119 Reinsurance commissions and with­profits expenses –69 –45

Other underwriting expenses 0 0 Total 155 155

22. Provision for Credit Risks

The provision for credit risks relates to the following balance sheet items: loans to and receivables from banks, loans to and receivables from customers, marketable securities and other assets; in the context of the provision for credit risks in respect of credit commitments and financial guarantees, it also relates to the “Other liabili­ ties” balance sheet item.

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The breakdown of the amount recognized in the consolidated income statement is as follows:

€ million 2020 2019

Additions to provision for credit risks –962 –819 Reversals of provision for credit risks 518 627 Direct write­offs –223 –160 Income from loans and receivables previously written off 66 59 Net gain or loss from significant modifications 0 – Total –600 –294

Additional credit risks to which the VW FS AG Group is exposed as a result of various critical situations (Brexit, economic crises) in the United Kingdom, Russia, Brazil, India, Mexico and the Republic of Korea were accounted for in the reporting period. Reversals in respect of India, Mexico and the Republic of Korea in the reporting year

gave rise to income of €47 million (previous year: income of €37 million), largely as a consequence of changes in business volume. In the previous year, the income resulted from additions for the United Kingdom and reversals for Brazil, Russia and the Republic of Korea.

23. Net Fee and Commission Income

Net fee and commission income largely comprises income and expenses from insurance brokerage, together with fees and commissions from the financing business and financial services business. The breakdown is as follows:

€ million 2020 2019

Fee and commission income 560 514 of which commissions from insurance broking 389 308 Fee and commission expenses1 –472 –358 of which sales commission from financing business1 –219 –173 Total1 89 156

1 Prior­year figures have been restated: reduction of €31 million (see section Changes to Prior­Year Figures).

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24. Net Gain or Loss on Hedges

The “Net gain or loss on hedges” item comprises gains and losses arising from the fair value measurement of hedging instruments and hedged items.

The details of the gains and losses are as follows:

€ million 2020 2019

Gains/losses on hedging instruments in fair value hedges 89 78 Gains/losses on hedged items in fair value hedges –89 –78 Gains/losses from the ineffective portion of hedging instruments in fair value hedges –50 –17 Gains/losses from the reclassification of cash flow hedge reserves 56 1 Gains/losses from translation of foreign currency loans/receivables and liabilities in cash flow hedges –57 –1 Gains/losses from the ineffective portion of hedging instruments in cash flow hedges 0 –1 Total –50 –18

The “Gains/losses from the ineffective portion of hedging instruments in fair value hedges” line item also in­ cludes the amortization of fair value adjustments in respect of hedged items in portfolio hedge accounting.

25. Net Gain/Loss on Financial Instruments Measured at Fair Value and on Derecogni­ tion of Financial Assets Measured at Fair Value through Other Comprehensive In­ come

The net gains or losses on derivatives not designated as hedging instruments, net gains or losses on marketable securities and loans/receivables measured at fair value through profit or loss, and net gains or losses on derec­ ognition of marketable securities measured at fair value through other comprehensive income are reported under this item. Gains and losses arising from changes in the fair value of derivatives that do not satisfy the IFRS 9 requirements for hedge accounting at micro level or the IAS 39 requirements for portfolio hedging are recognized under gains and losses on derivatives not designated as hedging instruments.

The details of the gains and losses are as follows:

€ million 2020 2019

Gains/losses on derivatives not designated as hedging instruments 9 –104 Gains/losses on marketable securities measured at fair value through profit/loss –1 2 Gains/losses on loans/receivables measured at fair value through profit/loss 1 1 Gains/losses on the derecognition of marketable securities measured at fair value through OCI 0 – Total 10 –100

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 81

26. General and Administrative Expenses

The breakdown of general and administrative expenses is shown in the following table:

€ million 2020 2019

Personnel expenses –926 –902 Non­staff operating expenses –1,068 –1,000 Advertising, public relations and sales promotion expenses –52 –49 Depreciation of and impairment losses on property and equipment, amortization of and impairment losses on intangible assets –78 –70 Other taxes –10 –12 Income from the reversal of provisions and accrued liabilities 62 27 Total –2,071 –2,006

Personnel expenses comprise wages and salaries of €747 million (previous year: €743 million) as well as social security, post­employment and other employee benefit costs of €179 million (previous year: €160 million).

The disclosures relating to the expenses from the depreciation of right­of­use assets included in general and administrative expenses and to the expenses from short­term leases and leases in which the underlying asset is of low value can be found in note (64) Leases. In accordance with the requirements specified in section 314(1) no. 9 of the HGB, the general and adminis­ trative expenses include the total fees charged in the reporting year by the auditor of the consolidated financial statements Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft (previous year: PricewaterhouseCoopers Wirtschaftsprüfungsgesellschaft), as shown in the following table.

€ million 2020 2019

Financial statement audit services 2 2 Other attestation services – 0 Tax consulting services 1 – Other services 0 2 Total 2 4

The fees paid to the auditor for audit services in the year under review was mostly attributable to the audit of the consolidated financial statements of VW FS AG and of the annual financial statements of German Group companies, as well as to reviews of the interim financial statements of German Group companies.

Volkswagen Financial Services AG | Annual Report 2020 82 Notes to the Consolidated Financial Statements Consolidated Financial Statements

27. Net Other Operating Income/Expenses

The breakdown of the net other operating income/expenses is as follows:

€ million 2020 2019

Gains on the measurement of non­hedge foreign currency loans/receivables and liabilities 96 105 Income from cost allocations to other entities in the Volkswagen Group 469 464 Income from the reversal of provisions and accrued liabilities 140 82 Income from claims for damages 30 25 Income from the disposal of vehicles under loan agreements and finance leases 657 590 Income from non­significant modifications 8 2 Miscellaneous operating income 187 174 Losses on the measurement of non­hedge foreign currency loans/receivables and liabilities –123 –5 Litigation and legal risk expenses –52 –86 Expenses from the disposal of vehicles under loan agreements and finance leases –698 –651 Expenses from non­significant modifications –11 –1 Miscellaneous operating expenses –181 –217 Total 521 482

28. Net Gain or Loss on Miscellaneous Financial Assets

The net gain/loss on miscellaneous financial assets includes dividend income, income and expenses arising from profit or loss transfers, and net gains or losses arising from the recognition of impairment losses on shares in unconsolidated subsidiaries, joint ventures and associates.

29. Other Financial Gains or Losses

Other financial gains or losses mainly consist of interest income and interest expenses in connection with tax­ related issues, pensions and other provisions.

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30. Income Tax Expense

Income tax expense includes the taxes charged in respect of the Volkswagen AG tax group, taxes for which VW FS AG and its consolidated subsidiaries are the taxpayers, and deferred taxes. The components of the in­ come tax expense are as follows:

€ million 2020 2019

Current tax income/expense, Germany –201 13 Current tax income/expense, foreign –421 –373 Current income tax expense –622 –360 of which income (+)/expense (–) related to prior periods (–11) (5) Deferred tax income (+)/expense (–), Germany 339 –68 Deferred tax income (+)/expense (–), foreign 52 53 Deferred tax income (+)/expense (–) 391 –14 Income tax expense –231 –374

The reported tax expense in 2020 of €231 million (previous year: €374 million) is €80 million lower (previous year: €3 million lower) than the expected tax expense of €311 million (previous year: €377 million) calculated by applying the tax rate of 30.0% (previous year: 29.8%) to the consolidated profit before tax.

The following reconciliation shows the relationship between the income tax expense and the profit before tax for the reporting period:

€ million 2020 2019

Profit before tax 1,038 1,264 multiplied by the domestic income tax rate of 30.0 % (previous year: 29.8 %) = Imputed income tax expense in the reporting period at the domestic income tax rate –311 –377 + Effects from different foreign tax rates 45 5 + Effects from tax­exempt income 60 56 + Effects from non­deductible operating expenses –144 –56 + Effects from loss carryforwards –1 –8 + Effects from permanent differences –26 –2 + Effects from tax credits 1 0 + Taxes attributable to prior periods 194 8 + Effects from changes in tax rates 3 6 + Effects from non­deductible withholding taxes –1 –2 + Other variances –52 –5 = Current income tax expense –231 –374 Effective tax rate in % 22.3 29.6

The statutory corporation tax rate in Germany for the 2020 assessment period was 15%. Including trade tax and the solidarity surcharge, this resulted in an aggregate tax rate of 29.97%. In the German tax group, a tax rate of 30.0% (previous year: 29.8%) was used to measure deferred taxes.

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The effects from different income tax rates outside Germany arise because of the different income tax rates in the individual countries in which the Group companies are domiciled compared with the rates in Germany. These rates outside Germany vary between 12.5% and 45.0% (previous year: 19.0% and 45.0%).

The following table shows a breakdown of the as yet unused tax loss carryforwards:

UNUSED TAX LOSS OF WHICH UNUSABLE TAX LOSS CARRYFORWARDS CARRYFORWARDS

€ million Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2020 Dec. 31, 2019

Usable indefinitely 166 160 157 154 Usable within the next 5 years 28 14 16 – Usable within 5 – 10 years 0 – – – Usable within more than 10 years 9 – – – Total 203 174 173 154 thereon deferred tax assets recognized 8 6 – –

The tax credits granted by various countries led to the recognition of a tax benefit in an amount of €0.7 million (previous year: €1.2 million).

The income taxes do not include any material amounts arising from the use of previously unrecognized tax losses, tax credits or temporary differences from previous periods. The deferred tax expense arising from im­ pairment losses on deferred tax assets amounted to €29 million (previous year: €8 million). There were no material effects from the recognition of the reversal of impairment losses in respect to deferred tax assets. In the reporting year, no deferred tax assets were recognized for deductible temporary differences amounting to €58 million. An effect on deferred taxes in an amount of €3 million (previous year: €6 million) arose throughout the Group in 2020 as a consequence of changes in tax rates. The Group has recognized deferred tax assets of €144 million (previous year: €64 million) against which there are no deferred tax liabilities in an equivalent amount. The companies involved are expecting to generate profits in the future following losses in the reporting or in the prior period. In accordance with IAS 12.39, deferred tax liabilities of €32 million (previous year: €26 million) have not been recognized for temporary differences and undistributed profits of subsidiaries because VW FS AG has the relevant control. Of the deferred taxes recognized in the balance sheet, an amount of €128 million (previous year: €104 million) relates to transactions reported in other comprehensive income. A breakdown of the changes in deferred taxes is presented in the statement of comprehensive income.

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31. Further Income Statement Disclosures

Fee and commission income and expenses related to fiduciary activities and to financial assets or financial liabilities not measured at fair value and not measured using the effective interest method:

€ million 2020 2019

Income from fees and commissions 29 44

Expenses from fees and commissions 0 0 Total 29 44

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Balance Sheet Disclosures

32. Cash Reserve

The cash reserve includes credit balances of €47 million (previous year: €106 million) held with foreign central banks.

33. Loans to and Receivables from Customers

The “Loans to and receivables from customers” item includes deductions arising from the provision for credit risks recognized to cover the expected credit risk. The provision for credit risks is presented in note (59). Loans to and receivables from customers arising from retail financing generally comprise loans to private and commercial customers for the financing of vehicles. The vehicle itself is normally pledged to us as collateral for the financing of vehicles. Dealer financing encompasses floor plan financing as well as loans to the dealer organization for operating equipment and investment. Again, assets are pledged as collateral, but guarantees and charges on real estate are also used as security. Receivables from leasing transactions include receivables from finance leases and receivables due in connection with lease assets. The other loans and receivables largely consist of loan and receivables from entities within the Volkswagen Group and receivables from leasing trans­ actions with a buyback agreement. Some of the fixed­income exposures associated with finance lease receivables have been hedged against fluctuations in the risk­free based interest rate using a portfolio hedge. Receivables from operating leases are excluded from this hedging strategy because they do not satisfy the definition of a financial instrument within the meaning of IFRS 9 and in conjunction with IAS 32.

The reconciliation to the balance sheet values is as follows:

€ million Dec. 31, 2020 Dec. 31, 2019

Loans to and receivables from customers 78,652 79,195 Fair value adjustment from portfolio hedging 19 2 Loans to and receivables from customers, net of fair value adjustment from portfolio hedging 78,633 79,194

Receivables from leasing transactions include due receivables amounting to €550 million (previous year: €497 million1). As of the reporting date, receivables from operating leases amounted to €307 million (previous year: €233 million).

At the end of the reporting period, a valuation allowance of €581 million (previous year: €628 million) was recognized as regards loans to and receivables from customers in the United Kingdom, Russia, Brazil, India, Mexico and the Republic of Korea, countries that are affected by various crises (Brexit, economic crises).

1 Prior­year figure restated: corrected from €495 million to €497 million because the sublease receivables had not been included (see section Changes to Prior­Year Figures).

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34. Derivative Financial Instruments

This item comprises the positive fair values from hedges and from derivatives not designated as a hedging instrument. The breakdown is as follows:

€ million Dec. 31, 2020 Dec. 31, 2019

Transactions to hedge against currency risk on assets using fair value hedges 14 9 currency risk on liabilities using fair value hedges 2 – interest­rate risk using fair value hedges 686 580 of which hedges against interest­rate risk using portfolio fair value hedges 0 6

interest­rate risk using cash flow hedges 0 1 currency and pricing risk on future cash flows using cash flow hedges 34 22 Hedging transactions 735 611 Assets arising from derivatives not designated as hedges 102 125 Total 837 736

35. Equity­Accounted Joint Ventures and Miscellaneous Financial Assets

Equity­accounted Miscellaneous € million investments financial assets Total

Gross carrying amount as of Jan. 1, 2019 689 492 1,181

Foreign exchange differences – 0 0 Changes in basis of consolidation – –5 –5 Additions 11 204 215 Reclassifications – – – Disposals – 5 5 Changes/remeasurements recognized in profit or loss 65 – 65 Dividends –12 – –12 Other changes recognized in other comprehensive income 2 –3 –1 Balance as of Dec. 31, 2019 754 683 1,437 Impairment losses as of Jan. 1, 2019 17 88 105 Foreign exchange differences – – – Changes in basis of consolidation – – – Additions – 9 9 Reclassifications – – – Disposals – 5 5 Reversal of impairment losses – – – Balance as of Dec. 31, 2019 17 92 109 Net carrying amount as of Dec. 31, 2019 737 591 1,328 Net carrying amount as of Jan. 1, 2019 671 404 1,075

Volkswagen Financial Services AG | Annual Report 2020 88 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Equity­accounted Miscellaneous € million investments financial assets Total

Gross carrying amount as of Jan. 1, 2020 754 683 1,437 Foreign exchange differences – –4 –4 Changes in basis of consolidation 52 –197 –146 Additions – 79 79 Reclassifications – – – Disposals – – – Changes/remeasurements recognized in profit or loss 64 – 64 Dividends –12 – –12 Other changes recognized in other comprehensive income –28 3 –25 Balance as of Dec. 31, 2020 830 564 1,394 Impairment losses as of Jan. 1, 2020 17 92 109

Foreign exchange differences – 0 0 Changes in basis of consolidation – –80 –80 Additions 70 92 162 Reclassifications – – – Disposals – – – Reversal of impairment losses – – – Balance as of Dec. 31, 2020 87 104 191 Net carrying amount as of Dec. 31, 2020 743 460 1,203 Net carrying amount as of Jan. 1, 2020 737 591 1,328

In the reporting year, impairment losses were recognized in an amount of €70 million for joint ventures meas­ ured using the equity method and in an amount of €81 million for non­consolidated subsidiaries included in miscellaneous financial assets. The amount of the impairment losses equated to the amount by which the determined recoverable amount fell below the carrying amount before recognition of the impairment losses. The methodology used to deter­ mine the recoverable amount was substantially the same as the methodology described in note 10 to deter­ mine impairment losses on goodwill.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 89

36. Intangible Assets

Internally Other generated Brand name, intangible € million software customer base Goodwill assets Total

Cost as of Jan. 1, 2019 35 20 12 122 188 Foreign exchange differences 0 0 0 4 4 Changes in basis of consolidation 1 4 5 36 45 Additions 1 – – 27 28 Reclassifications – – – – – Disposals – – – 6 6 Balance as of Dec. 31, 2019 36 24 17 182 259 Amortization and impairment losses as of Jan. 1, 2019 31 3 – 90 124 Foreign exchange differences 0 0 – 2 2 Changes in basis of consolidation 1 2 – 23 26 Additions to cumulative amortization 1 1 – 16 18 Additions to cumulative impairment losses – – – – – Reclassifications – – – – – Disposals – – – 2 2 Reversal of impairment losses – – – – – Balance as of Dec. 31, 2019 33 6 – 129 168 Net carrying amount as of Dec. 31, 2019 4 18 17 52 91 Net carrying amount as of Jan. 1, 2019 4 17 12 32 64

Volkswagen Financial Services AG | Annual Report 2020 90 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Internally Other generated Brand name, intangible € million software customer base Goodwill assets Total

Cost as of Jan. 1, 2020 36 24 17 182 259 Foreign exchange differences –3 –1 –1 –9 –13 Changes in basis of consolidation – – – 13 13 Additions 20 – – 21 41 Reclassifications – – – – – Disposals 2 – – 19 21 Balance as of Dec. 31, 2020 51 24 16 188 279 Amortization and impairment losses as of Jan. 1, 2020 33 6 – 129 168

Foreign exchange differences –2 0 – –6 –8 Changes in basis of consolidation – – – 9 9 Additions to cumulative amortization 1 1 – 20 21 Additions to cumulative impairment losses – – – 0 0 Reclassifications – – – – – Disposals 1 – – 4 4 Reversal of impairment losses – – – – – Balance as of Dec. 31, 2020 31 6 – 149 186 Net carrying amount as of Dec. 31, 2020 20 17 16 39 92 Net carrying amount as of Jan. 1, 2020 4 18 17 52 91

The goodwill of €16 million (previous year: €17 million) and brand names of €17 million (previous year: €17 million) in Poland and Germany reported on the balance sheet as of the reporting date have an indefinite useful life. The indefinite useful life arises because goodwill and brand names are linked to the relevant cash­ generating unit and will therefore remain in existence for as long as this unit remains in existence. The cus­ tomer base in Poland and Germany is being amortized over a period of ten years. The remaining amortization periods for the customer bases in both Poland and Germany is one year. Of the total recognized goodwill, €11 million (previous year: €12 million) was attributable to Poland and €5 million (previous year: €5 million) to Germany. Of the total recognized brand names, €6 million (previous year: €6 million) was attributable to Poland and €11 million (previous year: €11 million) to Germany. The dis­ count rates used in the impairment tests were 9.2% (previous year: 9.4%) for Poland and 8.7% (previous year: 6.6%) for Germany. The impairment tests for the reported goodwill and brand names are based on the value in use. The values in use determined for the reported goodwill and brand names in the impairment test exceeded the correspond­ ing carrying amounts, so no impairment loss requirement was identified for the reported goodwill or brand names. The VW FS AG Group also carried out sensitivity analyses as part of the impairment tests. No change in certain material assumptions would lead to the recognition of an impairment loss for goodwill or brand names.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 91

37. Property and Equipment

Operating Land and and office € million buildings equipment Total

Cost as of Jan. 1, 2019 435 131 566 Foreign exchange differences 2 2 3 Changes in basis of consolidation 59 38 96 Additions 66 21 87 Reclassifications –1 –1 –2 Disposals 16 18 34 Balance as of Dec. 31, 2019 545 172 717 Depreciation and impairment losses as of Jan. 1, 2019 99 55 154 Foreign exchange differences 0 1 1 Changes in basis of consolidation 2 20 23 Additions to cumulative depreciation 32 21 53

Additions to cumulative impairment losses – 0 0

Reclassifications – 0 0 Disposals 1 10 11

Reversal of impairment losses 0 0 0 Balance as of Dec. 31, 2019 131 87 218 Net carrying amount as of Dec. 31, 2019 413 85 498 Net carrying amount as of Jan. 1, 2019 337 76 412

Volkswagen Financial Services AG | Annual Report 2020 92 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Operating Land and and office € million buildings equipment Total

Cost as of Jan. 1, 2020 545 172 717 Foreign exchange differences –10 –8 –18 Changes in basis of consolidation 0 3 3 Additions 67 15 82 Reclassifications –2 2 0 Disposals 22 13 35 Balance as of Dec. 31, 2020 578 171 749 Depreciation and impairment losses as of Jan. 1, 2020 131 87 218 Foreign exchange differences –2 –5 –7 Changes in basis of consolidation – 1 1 Additions to cumulative depreciation 35 21 56 Additions to cumulative impairment losses – – – Reclassifications – 0 0 Disposals 3 11 14 Reversal of impairment losses 0 – 0 Balance as of Dec. 31, 2020 161 94 255 Net carrying amount as of Dec. 31, 2020 417 77 494 Net carrying amount as of Jan. 1, 2020 413 85 498

In connection with land and buildings, land charges of €18 million (previous year: €13 million) serve as collat­ eral for financial liabilities. Assets under construction with a carrying amount of €20 million (previous year: €13 million) are included in land and buildings.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 93

38. Investment Property

The following table shows the changes in investment property assets in the prior year:

Investment € million property

Cost as of Jan. 1, 2019 26 Foreign exchange differences 0 Changes in basis of consolidation 6 Additions – Reclassifications – Disposals – Balance as of Dec. 31, 2019 32 Depreciation and impairment losses as of Jan. 1, 2019 13 Foreign exchange differences 0 Changes in basis of consolidation 1 Additions to cumulative depreciation 1 Additions to cumulative impairment losses – Reclassifications – Disposals – Reversal of impairment losses 0 Balance as of Dec. 31, 2019 15 Net carrying amount as of Dec. 31, 2019 17 Net carrying amount as of Jan. 1, 2019 13

Volkswagen Financial Services AG | Annual Report 2020 94 Notes to the Consolidated Financial Statements Consolidated Financial Statements

The following table shows the changes in investment property assets in the reporting year:

Investment € million property

Cost as of Jan. 1, 2020 32

Foreign exchange differences 0 Changes in basis of consolidation – Additions 0 Reclassifications – Disposals 3 Balance as of Dec. 31, 2020 29 Depreciation and impairment losses as of Jan. 1, 2020 15

Foreign exchange differences 0 Changes in basis of consolidation – Additions to cumulative depreciation 1 Additions to cumulative impairment losses – Reclassifications – Disposals 2 Reversal of impairment losses 0 Balance as of Dec. 31, 2020 13 Net carrying amount as of Dec. 31, 2020 15 Net carrying amount as of Jan. 1, 2020 17

The fair value of investment property amounts to €16 million (previous year: €24 million). The fair value is determined using an income approach based on internal calculations (Level 3 of the fair value hierarchy). Oper­ ating expenses of €1 million (previous year: €1 million) were incurred in the reporting period for the mainte­ nance of investment property.

Rental income from investment property of €2 million (previous year: €2 million) is included in the income from leasing transactions line item in the income statement.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 95

39. Deferred Tax Assets

The deferred tax assets comprise exclusively of deferred income tax assets, the breakdown of which is as fol­ lows:

€ million Dec. 31, 2020 Dec. 31, 2019

Deferred tax assets 8,579 8,098 of which noncurrent 5,502 5,286 Recognized benefit from unused tax loss carryforwards, net of valuation allowances 8 6 of which noncurrent 8 6 Offset (with deferred tax liabilities) –6,833 –6,591 Total 1,753 1,513

Deferred tax assets are recognized in connection with the following balance sheet items:

€ million Dec. 31, 2020 Dec. 31, 2019

Loans, receivables and other assets 805 801 Marketable securities and cash 3 3 Intangible assets/property and equipment 312 20 Lease assets 6,367 6,253 Liabilities and provisions 1,120 1,021 Valuation allowances for deferred assets on temporary differences –28 – Total 8,579 8,098

40. Other Assets

The details of other assets are as follows:

€ million Dec. 31, 2020 Dec. 31, 2019

Vehicles returned for disposal 1,092 1,058 Restricted cash 777 810 Prepaid expenses and accrued income 293 313 Other tax assets 319 381 Reinsurers’ share of underwriting provisions 41 58 Miscellaneous 676 657 Total 3,197 3,276

Volkswagen Financial Services AG | Annual Report 2020 96 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Contract origination costs of €63 million (previous year: €65 million) had been capitalized as of December 31, 2020. In 2020, the amortization expenses relating to capitalized contract origination costs amounted to €29 million (previous year: €13 million). No impairment losses were recognized in 2019 and 2020 in respect of the capitalized contract origination costs.

The breakdown of the reinsurers’ share of underwriting provisions is as follows:

€ million Dec. 31, 2020 Dec. 31, 2019

Reinsurers’ share of provisions for claims outstanding 39 42 Reinsurers’ share of provisions for unearned premiums 0 14 Reinsurers’ share of other underwriting provisions 1 2 Total 41 58

41. Noncurrent Assets

of which of which € million Dec. 31, 2020 noncurrent Dec. 31, 2019 noncurrent

Cash reserve 47 – 106 – Loans to and receivables from banks 3,830 200 2,477 303 Loans to and receivables from customers1 78,652 41,855 79,195 41,459 Derivative financial instruments 837 734 736 673 Marketable securities 312 – 305 – Equity­accounted joint ventures 743 743 737 737 Miscellaneous financial assets 460 460 591 591 Intangible assets 92 92 91 91 Property and equipment 494 494 498 498 Lease assets 27,311 24,537 22,776 20,082 Investment property 15 15 17 17 Current tax assets 103 3 125 5 Other assets 3,197 485 3,276 546 Total1 116,092 69,618 110,931 65,003

1 The prior­year figure for noncurrent loans to and receivables from customers has been restated from €18,494 million to €41,459 million following the correction of an error. Due to the incorrect implementation of disclosures of lease receivables from customers, some maturity ranges of noncurrent receivables had not been taken into account. The correction of this error relates only to this disclosure on noncurrent receivables from customers. There are no other effects on the balance sheet, the statement of comprehensive income, or other disclosures.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 97

42. Liabilities to Banks and Customers

To cover the capital requirements for the leasing and financing activities, the entities in the VW FS AG Group make use of, among other things, credit and loans provided by the entities in the Volkswagen Group. These items are included in the liabilities to banks and liabilities to customers.

In the previous year, receivables from finance leases of €779 million were pledged as collateral for liabilities to banks. The liabilities to customers also included contractual liabilities from service contracts and other contracts amounting to €1,196 million, in connection with which income of €640 million was expected to be recognized in the next fiscal year, followed by income of €556 million in subsequent years.

43. Notes, Commercial Paper Issued

This item comprises bonds and commercial paper.

€ million Dec. 31, 2020 Dec. 31, 2019

Bonds issued 56,475 56,443 Commercial paper issued 5,513 4,501 Total 61,988 60,943

Customer and dealer financing loans and receivables amounting to €33 million (previous year: €181 million) have been pledged as collateral for issued bonds not related to ABS transactions.

44. ABS Transactions

The VW FS AG Group uses ABS transactions for funding purposes. The related liabilities are recognized in the following balance sheet items:

€ million Dec. 31, 2020 Dec. 31, 2019

Bonds issued 25,633 24,102 Subordinated liabilities 644 1,996 Total 26,277 26,097

Of the total amount of liabilities arising in connection with ABS transactions, an amount of €21,173 million (previous year: €22,262 million) is accounted for by ABS transactions with financial assets. The corresponding carrying amount of loans/receivables from retail financing and leasing business is €24,136 million (previous year: €23,551 million). As of December 31, 2020, the fair value of the liabilities amounted to €21,267 million (previous year: €22,281 million). The fair value of the assigned loans/receivables, which continued to be recog­ nized, amounted to €24,852 million (previous year: €24,342 million) as of December 31, 2020. Collateral totaling €30,229 million (previous year: €28,251 million) has been pledged in connection with ABS transactions, of which €24,584 million (previous year: €24,084 million) is accounted for by collateral in the form of financial assets. In these arrangements, the expected payments are assigned to special purpose entities and the ownership of the collateral in the financed vehicles is transferred. The assigned loans/receivables can­ not be assigned again to anyone else or used in any other way as collateral. The rights of the bond holders are

Volkswagen Financial Services AG | Annual Report 2020 98 Notes to the Consolidated Financial Statements Consolidated Financial Statements

limited to the assigned loans/receivables, and the payment receipts arising from these loans/receivables are used to repay the corresponding liability. These asset­backed security transactions did not lead to a derecognition of the loans or receivables from the financial services business because the credit risk and timing risk were retained in the Group. The difference between the amount of the assigned loans/receivables and the associated liabilities results from the different terms and conditions and from the proportion of the ABSs held by the VW FS AG Group itself.

The bulk of the public and private ABS transactions in the VW FS AG Group can be repaid early (with a clean­up call) when less than 10% of the original transaction volume remains outstanding.

45. Derivative Financial Instruments

This item comprises the negative fair values from hedges and from derivatives not designated as a hedging instrument. The breakdown is as follows:

€ million Dec. 31, 2020 Dec. 31, 2019

Transactions to hedge against currency risk on assets using fair value hedges 20 13 currency risk on liabilities using fair value hedges 5 1 interest­rate risk using fair value hedges 108 78 of which hedges against interest­rate risk using portfolio fair value hedges 101 63 interest­rate risk using cash flow hedges 15 14 currency and pricing risk on future cash flows using cash flow hedges 21 7 Hedging transactions 170 114 Liabilities arising from derivatives not designated as hedges 294 313 Total 464 427

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 99

46. Provisions for Pensions and Other Post­Employment Benefits

The following amounts have been recognized in the balance sheet for benefit commitments:

€ million Dec. 31, 2020 Dec. 31, 2019

Present value of funded obligations 478 384 Fair value of plan assets 246 217 Funded status (net) 232 167 Present value of unfunded obligations 362 336 Amount not recognized as an asset because of the ceiling in IAS 19 – 0 Net liability recognized in the balance sheet 595 503 of which provisions for pensions 596 505 of which other assets 1 2

Key pension arrangements in the VW FS AG Group: For the period after the active working life of employees, the VW FS AG Group offers its employees benefits under attractive, state­of­the­art occupational pension arrangements. Most of the arrangements in the VW FS AG Group are pension plans for employees in Germany classified as defined benefit plans under IAS 19. The majority of these obligations are funded by provisions recognized in the balance sheet. These plans are now closed for new members. To reduce the risks associated with defined benefit plans, in particular longevity, salary increases and inflation, the VW FS AG Group has introduced new defined benefit plans in recent years in which the benefits are funded by appropriate external plan assets. The risks referred to above have been signifi­ cantly reduced in these pension plans. The proportion of the total defined benefit obligation attributable to pension obligations funded by plan assets will continue to rise in the future. The main pension commitments are described below.

German pension plans funded solely by recognized provisions The pension plans funded solely by recognized provisions comprise both defined contribution plans with guarantees and final salary plans. For defined contribution plans, an annual pension expense dependent on income and status is converted into a lifelong pension entitlement using annuity factors (guaranteed modular pension entitlements). The annuity factors include a guaranteed rate of interest. The modular pension entitle­ ments earned annually are added together at retirement. For final salary plans, the underlying salary is multi­ plied at retirement by a percentage that depends on the years of service up to the retirement date. The present value of the guaranteed obligation rises as interest rates fall and is therefore exposed to interest rate risk. The pension system provides for lifelong pension payments. The companies therefore bear the longevity risk. This is accounted for by calculating the annuity factors and the present value of the guaranteed obligation using the latest generational mortality tables – the “Heubeck 2018 G” mortality tables – which already reflect future in­ creases in life expectancy. To reduce the inflation risk from adjusting the regular pension payments by the rate of inflation, a pension adjustment that is not indexed to inflation was introduced for pension plans where this is permitted by law.

German pension plans funded by external plan assets The pension plans funded by external plan assets are defined contribution plans with guarantees. In this case, an annual pension expense dependent on income and status is either converted into a lifelong pension enti­ tlement using annuity factors (guaranteed modular pension entitlement) or paid out in a single lump sum or in installments. In some cases, employees also have the opportunity to provide for their own retirement through deferred compensation. The annuity factors include a guaranteed rate of interest. The modular pen­ sion entitlements earned annually are added together at retirement. The pension expense is contributed on an ongoing basis to a separate pool of assets that is administered independently of the Company in trust and invested in the capital markets. If the plan assets exceed the present value of the obligations calculated using

Volkswagen Financial Services AG | Annual Report 2020 100 Notes to the Consolidated Financial Statements Consolidated Financial Statements

the guaranteed rate of interest, surpluses are allocated (modular pension bonuses). As the assets administered in the trust meet the IAS 19 criteria for classification as plan assets, they are offset against the obligations. The amount of the plan assets is exposed to general market risk. The investment strategy and its implemen­ tation are therefore continuously monitored by the trusts’ governing bodies, on which the companies are also represented. For example, investment policies are stipulated in investment guidelines with the aim of limiting market risk and its impact on plan assets. In addition, asset­liability management analyses are conducted at regular intervals so as to ensure that investments are in line with the obligations that need to be covered. The pension assets are currently invested primarily in fixed­income or equity funds. Interest rates and equity prices therefore present the main risks. To mitigate market risk, the pension system also provides for funds to be set aside in an equalization reserve before any surplus is allocated. The present value of the obligation is reported as the maximum of the present value of the guaranteed obli­ gation and of the plan assets. If the value of the plan assets falls below the present value of the guaranteed obli­ gation, a provision must be recognized for the difference. The present value of the guaranteed obligation rises as interest rates fall and is therefore exposed to interest rate risk. In the case of lifelong pension payments, the VW FS AG Group bears the longevity risk. This is accounted for by calculating the annuity factors and the present value of the guaranteed obligation using the latest genera­ tional mortality tables – the “Heubeck 2018 G” mortality tables – which already reflect future increases in life expectancy. In addition, the independent actuaries carry out annual risk monitoring as part of the review of the assets administered by the trusts. To reduce the inflation risk from adjusting the regular pension payments by the rate of inflation, a pension adjustment that is not indexed to inflation was introduced for pension plans where this is permitted by law. The calculation of the present value of the defined benefit obligations was based on the following actuarial assumptions:

GERMANY INTERNATIONAL

Percent Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2020 Dec. 31, 2019

Discount rate 0.70 1.10 1.43 2.02 Pay trend 3.36 3.70 4.91 5.49 Pension trend 1.50 1.50 2.70 2.96 Staff turnover rate 1.10 1.10 6.65 2.20

These assumptions are averages that were weighted using the present value of the defined benefit obligation. The reduction in the international discount rate results mainly from the effect of a changed scope of companies on the weighting of the average discount rate. With regard to life expectancy, the latest mortality tables in every country are taken into account. For ex­ ample, in Germany calculations are based on the “2018 G” mortality tables developed by Professor Dr. Klaus Heubeck. The discount rates are generally determined to reflect the yields on prime­rated corporate bonds with matching maturities and currencies. The iBoxx AA 10+ Corporates index was taken as the basis for the obliga­ tions of German Group companies. Similar indices were used for foreign pension obligations. During the reporting year, changes were made to the estimation methods for individual steps in the procedure for determining the EUR discount rate to better recflect the persistently low interest rate in the measurement methodology. The adjustment resulted in an increase in the discount rate of 0.1 percentage points and a result­ ing reduction of €21.4 million in actuarial losses. The pay trends cover expected wage and salary trends, which also include increases attributable to career development. The pension trends either reflect the contractually guaranteed pension adjustments or are based on the rules on pension adjustments in force in each country. The employee turnover rates are based on past experience and future expectations.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 101

The following table shows changes in the net defined benefit liability recognized in the balance sheet:

€ million 2020 2019

Net liability recognized in the balance sheet as of January 1 503 364 Current service cost 49 32 Net interest expense 5 7 Actuarial gains (–)/losses (+) arising from changes in demographic assumptions 0 0 Actuarial gains (–)/losses (+) arising from changes in financial assumptions 74 135 Actuarial gains (–)/losses (+) arising from experience adjustments –1 –1 Income/expenses from plan assets not included in interest income 11 8 Change in amount not recognized as an asset because of the ceiling in IAS 19 – 1 Employer contributions to plan assets 20 17 Employee contributions to plan assets – – Pension payments from company assets 4 4 Past service cost (including plan curtailments) – 0 Gains (–) or losses (+) arising from plan settlements – – Changes in basis of consolidation – –1

Other changes 0 –3 Foreign exchange differences from foreign plans 0 0 Net liability recognized in the balance sheet as of December 31 595 503

The change in the amount not recognized as an asset because of the ceiling in IAS 19 includes an interest com­ ponent, some of which is recognized in profit or loss under general and administrative expenses and some of which is recognized in other comprehensive income.

The change in the present value of the defined benefit obligation is attributable to the following factors:

€ million 2020 2019

Present value of obligations as of January 1 720 519 Current service cost 49 32 Interest cost (unwinding of discount on obligations) 8 12 Actuarial gains (–)/losses (+) arising from changes in demographic assumptions 0 0 Actuarial gains (–)/losses (+) arising from changes in financial assumptions 74 135 Actuarial gains (–)/losses (+) arising from experience adjustments –1 –1 Employee contributions to plan assets – – Pension payments from company assets 4 4 Pension payments from plan assets 2 2 Past service cost (including plan curtailments) – 0 Gains (–) or losses (+) arising from plan settlements – – Changes in basis of consolidation – 31

Other changes 0 –4 Foreign exchange differences from foreign plans –3 2 Present value of obligations as of December 31 841 720

Volkswagen Financial Services AG | Annual Report 2020 102 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Changes in the relevant actuarial assumptions would have had the following effects on the defined benefit obligation:

DEC. 31, 2020 DEC. 31, 2019 Present value of defined benefit obligation if € million Change in percent € million Change in percent

is 0.5 percentage Discount rate points higher 747 –11.20 641 –10.99 is 0.5 percentage points lower 952 13.21 813 12.94 is 0.5 percentage Pension trend points higher 874 3.96 750 4.14 is 0.5 percentage points lower 810 –3.61 693 –3.73 is 0.5 percentage Pay trend points higher 848 0.86 727 1.05 is 0.5 percentage points lower 834 –0.79 713 –0.95 increases by one Longevity year 869 3.35 743 3.17

The sensitivity analysis shown above considers the change in one assumption at a time, leaving the other as­ sumptions unchanged versus the original calculation. In other words, any correlation effects between the indi­ vidual assumptions are ignored. To examine the sensitivity of the present value of the defined benefit obligation to a change in assumed longev­ ity, the estimates of mortality were reduced as part of a comparative calculation by a measure that was roughly equivalent to an increase in life expectancy of one year. The average duration of the defined benefit obligation weighted by the present value of the defined benefit obligation (Macaulay duration) is 24 years (previous year: 24 years).

The following table shows a breakdown of the present value of the defined benefit obligation by category of plan member:

€ million 2020 2019

Active members with pension entitlements 657 567 Members with vested entitlements who have left the Company 55 54 Retirees 129 99 Total 841 720

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 103

The maturity profile of payments attributable to the defined benefit obligation is presented in the following table, which classifies the present value of the obligation by the maturity of the underlying payments:

€ million 2020 2019

Payments due within the next fiscal year 7 6 Payments due between two and five years 41 36 Payments due in more than five years 793 678 Total 841 720

Changes in plan assets are shown in the following table:

€ million 2020 2019

Fair value of plan assets as of January 1 217 156 Interest income on plan assets determined using the discount rate 3 5 Income/expenses from plan assets not included in interest income 11 8 Employer contributions to plan assets 20 17 Employee contributions to plan assets – – Pension payments from plan assets 2 2 Gains (+) or losses (–) arising from plan settlements – – Changes in basis of consolidation – 32 Other changes 0 –1 Foreign exchange differences from foreign plans –3 2 Fair value of plan assets as of December 31 246 217

The investment of the plan assets to cover future pension obligations resulted in a net result of €14 million (previous year: net result of €12 million). Employer contributions to plan assets are expected to amount to €20 million (previous year: €19 million) in the next fiscal year.

Volkswagen Financial Services AG | Annual Report 2020 104 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Plan assets are invested in the following asset classes:

DEC. 31, 2020 DEC. 31, 2019

Quoted No quoted Quoted No quoted prices in prices in prices in prices in active active active active € million markets markets Total markets markets Total

Cash and cash equivalents 11 – 11 9 – 9 Equity instruments 3 – 3 3 – 3 Debt instruments 18 – 18 23 – 23 Direct investments in real estate – – – – – –

Derivatives 0 0 0 5 –1 4 Equity funds 73 – 73 51 – 51 Bond funds 136 – 136 124 – 124 Real estate funds 0 – 0 1 – 1 Other funds 1 0 1 0 0 0 Asset­backed securities – – – – – – Structured debt – – – – – – Other – 2 2 1 2 2

Of the total plan assets, 53% (previous year: 57%) are invested in German assets, 16% (previous year: 18%) in other European assets and 31% (previous year: 25%) in assets in other regions. Investments of plan assets in debt instruments issued by the Volkswagen Group are of minor significance.

The following amounts have been recognized in the income statement:

€ million 2020 2019

Current service cost 49 32 Net interest on the net defined benefit liability 5 7 Past service cost (including plan curtailments) – 0 Gains (–) or losses (+) arising from plan settlements – – Net income (–) and expenses (+) recognized in profit or loss 54 39

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 105

47. Underwriting Provisions and Other Provisions

€ million Dec. 31, 2020 Dec. 31, 2019

Underwriting provisions 405 408 Other provisions 422 532 Total 827 940

The following table shows the changes in underwriting provisions:

UNDERWRITING PROVISIONS

Provision for Provision for Other claims unearned underwriting € million outstanding premiums provisions Total

Balance as of Jan. 1, 2019 84 325 7 416 Changes to basis of consolidation – – – – Utilization 32 161 3 197 Additions 39 147 2 188 Balance as of Dec. 31, 2019 91 311 6 408

UNDERWRITING PROVISIONS

Provision for Provision for Other claims unearned underwriting € million outstanding premiums provisions Total

Balance as of Jan. 1, 2020 91 311 6 408 Changes to basis of consolidation – – – – Utilization 34 157 3 194 Additions 37 152 2 191 Balance as of Dec. 31, 2020 94 306 5 405

Volkswagen Financial Services AG | Annual Report 2020 106 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Maturity profile of underwriting provisions:

DEC. 31, 2020 DEC. 31, 2019

Remaining Remaining maturity of more maturity of more € million than one year Total than one year Total

Provision for claims outstanding 56 94 55 91 Provision for unearned premiums 166 306 165 311 Other underwriting provisions – 5 – 6 Total 222 405 220 408

Underwriting provisions for direct insurance business:

2 020 2 019

Remaining Remaining maturity of maturity of more than one more than one € million year Total year Total

Balance as of Jan. 1 38 120 37 133 Utilization 24 84 26 94 Additions 18 81 30 81 Transfers 0 0 –3 0 Balance as of Dec. 31 32 117 38 120

The underwriting provisions for direct insurance business were recognized in respect of warranty insurance and repair costs insurance.

Changes in the underwriting provisions for reinsurance business, by class of insurance:

2 019

Vehicle Credit protection € million insurance insurance Other Total

Balance as of Jan. 1 50 186 47 283 Utilization 4 84 14 102 Additions 5 89 13 107 Balance as of Dec. 31 51 192 45 288

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 107

2 020

Vehicle Credit protection € million insurance insurance Other Total

Balance as of Jan. 1 51 192 45 288 Utilization 6 87 17 110 Additions 11 88 11 110 Balance as of Dec. 31 56 193 39 288

In the reporting period, other provisions were broken down into provisions for employee expenses, provisions for litigation and legal risks, and miscellaneous provisions.

The following table shows the changes in other provisions, including maturities:

Employee Litigation Miscellaneous € million expenses and legal risks provisions Total

Balance as of Jan. 1, 2019 91 277 125 492 Foreign exchange differences 1 –1 0 0 Changes in basis of consolidation 20 5 1 26 Utilization 40 16 47 103 Additions/new provisions 61 90 49 200 Unwinding of discount/effect of change in discount rate – 2 – 2 Reversals 10 69 8 86 Balance as of Dec. 31, 2019 123 288 121 532 of which current 61 52 92 206 of which noncurrent 62 236 28 326 Balance as of Jan. 1, 2020 123 288 121 532 Foreign exchange differences –3 –43 –1 –47 Changes in basis of consolidation 3 0 1 3 Utilization 55 10 36 100 Additions/new provisions 65 52 60 177 Unwinding of discount/effect of change in discount rate – 1 – 1 Reversals 7 115 22 143 Balance as of Dec. 31, 2020 125 174 123 422 of which current 59 24 85 168 of which noncurrent 67 150 38 255

Provisions for employee expenses are recognized primarily for annually recurring bonuses such as long­term­ service awards and other employee expenses. The provisions for litigation and legal risks reflect the risks identified as of the reporting date in relation to utilization and legal expenses arising from the latest decisions by the courts and from ongoing civil proceed­ ings involving dealers and other customers. Based on analysis of the individual matters covered by the provi­ sions, the VW FS AG Group believes that the disclosure of further detailed information on individual proceed­ ings, legal disputes or legal risks could seriously prejudice the course or initiation of proceedings.

Volkswagen Financial Services AG | Annual Report 2020 108 Notes to the Consolidated Financial Statements Consolidated Financial Statements

The timing of the cash outflows in connection with other provisions is expected to be as follows: 40% in the next year, 50% in the years 2022 to 2025 and 11% thereafter.

48. Deferred Tax Liabilities

The breakdown of the deferred tax liabilities is as follows:

€ million Dec. 31, 2020 Dec. 31, 2019

Deferred tax liabilities 7,404 7,246 of which noncurrent 4,288 4,113 Offset (with deferred tax assets) –6,833 –6,591 Total 571 655

The deferred tax liabilities include taxes arising on temporary differences between amounts in the IFRS finan­ cial statements and those determined in the calculation of taxable profits in the Group entities.

Deferred tax liabilities have been recognized in connection with the following balance sheet items:

€ million Dec. 31, 2020 Dec. 31, 2019

Loans, receivables and other assets 6,339 6,385 Marketable securities and cash 18 2 Intangible assets/property and equipment 56 38 Lease assets 643 528 Liabilities and provisions 347 294 Total 7,404 7,246

49. Other Liabilities

The details of other liabilities are as follows:

€ million Dec. 31, 2020 Dec. 31, 2019

Prepaid expenses and accrued income 1,217 944 Other tax liabilities 189 209 Social security and payroll liabilities 148 158 Miscellaneous 130 102 Total 1,684 1,413

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 109

50. Subordinated Capital

The subordinated capital of €3,526 million (previous year: €4,947 million) was issued or raised by Volkswagen Leasing GmbH, Volkswagen Financial Services (UK) Ltd., Volkswagen Finans Sverige AB, Banco Volkswagen S.A. and VW FS AG.

51. Noncurrent Liabilities

of which of which € million Dec. 31, 2020 noncurrent Dec. 31, 2019 noncurrent

Liabilities to banks 14,674 5,454 14,472 5,486 Liabilities to customers 20,208 10,036 15,740 4,586 Notes, commercial paper issued 61,988 42,850 60,943 42,272 Derivative financial instruments 464 315 427 306 Current tax liabilities 548 295 373 161 Other liabilities 1,684 755 1,413 586 Subordinated capital 3,526 3,239 4,947 4,421 Total 103,091 62,945 98,315 57,819

52. Equity

The subscribed capital of VW FS AG is divided into 441,280,000 fully paid up no­par­value bearer shares, each with a notional value of €1, which are all held by Volkswagen AG, Wolfsburg. There are no preferential rights or restrictions in connection with the subscribed capital. The capital contributions made by the sole shareholder, Volkswagen AG, are reported under the capital re­ serves of VW FS AG. The retained earnings comprise the profits from previous fiscal years that have not been distributed. The re­ tained earnings include a legal reserve of €44 million (previous year: €44 million). On the basis of the control and profit­and­loss transfer agreement with the sole shareholder, Volkswagen AG, the loss of €673 million (previous year: loss absorption of €268 million) in accordance with the HGB incurred by VW FS AG was absorbed.

53. Capital Management

In this context, capital is generally defined as equity in accordance with the IFRS. The aims of capital manage­ ment in the VW FS AG Group are to support the Company’s credit rating by ensuring that the Group has ade­ quate capital backing and is able to obtain capital for the planned growth over the next few years. Generally speaking, corporate action implemented by the parent company of VW FS AG has an impact on VW FS AG’s equity in accordance with IFRS. However, in contrast to the previous year, the parent company did not imple­ ment any corporate action in the reporting year. As of December 31, 2020, the equity ratio was 10.8% (previous year: 10.7%).

Volkswagen Financial Services AG | Annual Report 2020 110 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Financial Instrument Disclosures

54. Carrying Amounts, Gains or Losses and Income or Expenses in respect of Financial Instruments, by Measurement Category

The carrying amounts of financial instruments (excluding hedge derivatives) broken down by IFRS 9 measure­ ment category are shown in the following table:

€ million Dec. 31, 2020 Dec. 31, 2019

Financial assets measured at fair value through profit or loss 451 516 Financial assets measured at fair value through other comprehensive income (debt instruments) 268 258 Financial assets measured at fair value through other comprehensive income (equity instruments) 6 2 Financial assets measured at amortized cost 43,143 42,453 Financial liabilities measured at fair value through profit or loss 294 313 Financial liabilities measured at amortized cost 99,114 94,886

Receivables from leasing business of €39,984 million (previous year: €39,951 million) do not have to be allocat­ ed to any of these categories.

The net gains or losses and income or expenses in respect of financial instruments (excluding hedge deriva­ tives) broken down by IFRS 9 measurement category are shown in the following table:

€ million 2020 2019

Financial instruments measured at fair value through profit or loss 22 –99 Financial assets measured at amortized cost1 1,646 2,127 Financial assets measured at fair value through other comprehensive income (debt instruments) 2 2 Financial liabilities measured at amortized cost –1,407 –1,466

1 Prior­year figure has been restated from €2,148 million to €2,127 million (see section Changes to Prior­Year Figures).

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 111

The net gains/losses and income/expenses are determined as follows:

Measurement category Measurement method

Financial instruments measured at fair value Fair value in accordance with IFRS 9 in conjunction with IFRS 13, including interest and through profit or loss effects from currency translation Interest income using the effective interest method and expenses/income from the recognition of valuation allowances in accordance with IFRS 9 and effects from currency Financial assets measured at amortized cost translation Financial assets measured at fair value Fair value valuation in accordance with IFRS 9 in conjunction with IFRS 13, interest income through other comprehensive income (debt using the effective interest method and expenses/income from the recognition of valuation instruments) allowances in accordance with IFRS 9 and effects from currency translation Financial liabilities measured at amortized Interest expense using the effective interest method in accordance with IFRS 9 and effects cost from currency translation

The interest income from financial assets measured at amortized cost or at fair value through other compre­ hensive income is included in interest income from lending transactions and marketable securities amounted to €1,999 million (previous year: €2,138 million1). The interest expenses in an amount of €1,295 million (previous year: €1,352 million) relate to financial in­ struments not measured at fair value through profit or loss. Expenses that arise from the direct write­off of uncollectible financial assets previously measured at amor­ tized cost are reported and explained as a component of the provision for credit risks line item in the income statement. Income recovered in respect of financial assets already written off is also reported and explained as a component of the provision for credit risks line item in the income statement. After recognizing the income and expenses referred to above, the VW FS AG Group did not generate or incur any material gains, losses, in­ come or expenses from the derecognition of financial assets measured at amortized cost that resulted from the elimination of a contractual right to cash flows or from a transfer subject to the fulfillment of the derecognition conditions. Furthermore, the Group did not generate or incur any material gains, losses, income or expenses from the derecognition of financial assets measured at amortized cost as a consequence of substantial contrac­ tual modifications (see disclosures on the provision for credit risks line item in the income statement).

1 Prior­year figure restated: corrected from €2,160 million (see section Changes to Prior­Year Figures)

Volkswagen Financial Services AG | Annual Report 2020 112 Notes to the Consolidated Financial Statements Consolidated Financial Statements

55. Classes of Financial Instruments

Financial instruments are divided into the following classes in the VW FS AG Group: > Measured at fair value > Measured at amortized cost > Derivative financial instruments designated as hedges > Not allocated to any measurement category > Credit commitments and financial guarantees (off­balance­sheet)

Loans/receivables and liabilities designated as hedges with derivative financial instruments are included in the class “Measured at amortized cost”. Within “Miscellaneous financial assets”, subsidiaries and joint ventures that are not consolidated for rea­ sons of materiality are not deemed financial instruments in accordance with IFRS 9 and therefore do not fall within the scope of IFRS 7. Equity investments forming part of miscellaneous financial assets are reported as financial instruments in accordance with IFRS 9 in the class “Measured at fair value”. Lease receivables and liabilities, receivables from insurance contracts, subsidiaries and joint ventures not consolidated for reasons of materiality, equity­accounted joint ventures and other instruments (other than financial instruments) are classified as “Not allocated to any measurement category” for the purposes of recon­ ciliation to the balance sheet.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 113

The following table shows a reconciliation of the relevant balance sheet items to the classes of financial instru­ ments:

DERIVATIVE FI NANCI AL NOT ALLOCATED TO INSTRUMENTS ANY BALANCE SHEET MEASURED AT FAIR MEASURED AT DESIGNATED AS MEASUREMENT ITEM VALUE AMORTIZED COST 1 HEDGES CATEGORY

Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, € million 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019

Assets Cash reserve 47 106 – – 47 106 – – – – Loans to and receivables from banks 3,830 2,477 – 34 3,830 2,443 – – – – Loans to and receivables from customers 78,652 79,195 305 310 38,346 38,921 – – 40,001 39,965 Derivative financial instruments 837 736 102 125 – – 735 611 – – Marketable securities 312 305 312 305 – – – – – – Equity­accounted joint ventures 743 737 – – – – – – 743 737 Miscellaneous financial assets 460 591 6 2 – – – – 454 588 Current tax assets 103 125 – – 2 20 – – 101 105 Other assets 3,197 3,276 – – 918 963 – – 2,278 2,313 Total 88,180 87,548 725 776 43,143 42,453 735 611 43,578 43,708

Equity and liabilities Liabilities to banks 14,674 14,472 – – 14,674 14,472 – – – – Liabilities to customers 20,208 15,740 – – 18,494 14,367 – – 1,714 1,373 Notes, commercial paper issued 61,988 60,943 – – 61,988 60,943 – – – – Derivative financial instruments 464 427 294 313 – – 170 114 – – Current tax liabilities 548 373 – – 266 60 – – 282 314 Other liabilities 1,684 1,413 – – 169 98 – – 1,515 1,315 Subordinated capital 3,526 4,947 – – 3,526 4,947 – – – – Total 103,091 98,315 294 313 99,116 94,887 170 114 3,511 3,002

1 Loans to and receivables from customers and liabilities to customers contain underlying transactions of fair value hedges.

The “Credit commitments and financial guarantees” class contains obligations under irrevocable credit com­ mitments and financial guarantees amounting to €1,313 million (previous year: €1,266 million).

Volkswagen Financial Services AG | Annual Report 2020 114 Notes to the Consolidated Financial Statements Consolidated Financial Statements

56. Fair Values of Financial Assets and Liabilities

The following table shows the fair values of financial instruments in the classes “measured at amortized cost”, “measured at fair value” and “derivative financial instruments designated as hedges”, together with the fair values of receivables from customers relating to the leasing business classified as “not allocated to any meas­ urement category”. The fair value is the amount at which financial assets or liabilities could be sold on fair terms as of the reporting date. Where market prices (e.g. for marketable securities) were available, VW FS AG has used these prices without modification for measuring fair value. If no market prices were available, the fair values for loans/receivables and liabilities were calculated by discounting using a maturity­matched discount rate appropriate to the risk. The discount rate was determined by adjusting risk­free yield curves, where appro­ priate, by relevant risk factors and taking into account capital and administrative costs. For reasons of material­ ity, the fair values of loans/receivables and liabilities due within one year were deemed to be the same as the carrying amount. The fair value of the unlisted equity investment reported under miscellaneous financial assets was deter­ mined using a measurement model based on strategic planning.

FAI R VALUE CARRYING AMOUNT DIFFERENCE

€ million Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2020 Dec. 31, 2019

Assets Measured at fair value Loans to and receivables from banks – 34 – 34 – – Loans to and receivables from customers 305 310 305 310 – – Derivative financial instruments 102 125 102 125 – – Marketable securities 312 305 312 305 – – Miscellaneous financial assets 6 2 6 2 – – Measured at amortized cost Cash reserve 47 106 47 106 – – Loans to and receivables from banks 3,832 2,445 3,830 2,443 2 2 Loans to and receivables from customers1 38,604 39,006 38,346 38,921 259 85 Current tax assets 2 20 2 20 – – Other assets 918 963 918 963 – – Derivative financial instruments designated as hedges 735 611 735 611 – – Not allocated to any measurement category Lease receivables 42,051 40,973 39,984 39,951 2,067 1,021 Equity and liabilities Measured at fair value Derivative financial instruments 294 313 294 313 – – Measured at amortized cost Liabilities to banks 14,668 14,421 14,674 14,472 –6 –51 Liabilities to customers 18,537 14,384 18,494 14,367 43 18 Notes, commercial paper issued 62,089 61,027 61,988 60,943 101 83 Current tax liabilities 266 60 266 60 – – Other liabilities 169 98 169 98 0 0 Subordinated capital 3,284 4,435 3,526 4,947 –242 –512 Derivative financial instruments designated as hedges 170 114 170 114 – –

1 Prior­year figures have been restated (fair value from €39,034 million to €39,006 million and difference from €113 million to €85 million) as a result of a change to the maturities and the associated correction of the fair value (see section Changes to Prior­Year Figures).

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 115

The fair values of financial instruments were determined on the basis of the following risk­free yield curves:

Percent EUR GBP JPY BRL MXN SEK CZK AUD CNY PLN INR RUB KRW DKK

Interest rate for six months –0.471 0.015 –0.146 2.095 4.490 0.049 0.454 0.015 2.850 0.179 4.914 4.681 0.683 –0.410 Interest rate for one year –0.515 –0.013 –0.096 2.884 4.393 0.003 0.555 0.025 2.902 0.152 4.985 4.876 0.734 –0.299 Interest rate for five years –0.465 0.193 –0.038 6.026 4.515 0.133 1.115 – 3.350 0.610 5.330 5.880 1.115 –0.189 Interest rate for ten years –0.265 0.397 0.051 – 5.275 0.388 1.285 0.983 4.070 1.080 5.510 6.460 1.275 –0.023

57. Measurement Levels of Financial Assets and Liabilities

For the purposes of fair value measurement and the associated disclosures, fair values are classified using a three­level measurement hierarchy. The following table shows the hierarchy breakdown for financial instru­ ments in the classes “measured at amortized cost”, “measured at fair value” and “derivative financial instru­ ments designated as hedges”. Classification to the individual levels is dictated by the extent to which the main inputs used in determining the fair value are or are not observable in the market. Level 1 is used to report the fair value of financial instruments such as marketable securities or notes and commercial paper issued for which a quoted price is directly observable in an active market. Level 2 fair values are measured on the basis of inputs observable in the markets, such as exchange rates or yield curves, using market­based valuation techniques. Fair values measured in this way include those for de­ rivatives and liabilities to customers. Level 3 fair values are measured using valuation techniques incorporating at least one input that is not di­ rectly observable in an active market. The fair values of loans to and receivables from customers measured at amortized cost and at fair value through profit or loss are largely allocated to Level 3 because these fair values are measured using inputs that are not observable in active markets (see note 56). An equity investment meas­ ured at fair value through other comprehensive income and using inputs that are not observable in the market is also reported under Level 3. The main inputs used to measure this equity investment are strategic planning and cost of equity rates. Level 3 also includes the fair values of separately recognized derivatives in connection with the risk of early termination resulting from derivatives for early termination rights embedded in finance leases. The inputs used to determine the fair value of derivatives in connection with the risk of early termination are forecasts, estimates of used vehicle residual values for the models concerned, and yield curves.

Volkswagen Financial Services AG | Annual Report 2020 116 Notes to the Consolidated Financial Statements Consolidated Financial Statements

The following table shows the allocation of financial instruments to the three­level fair value hierarchy by class:

LEVEL 1 LEVEL 2 LEVEL 3

€ million Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2020 Dec. 31, 2019

Assets Measured at fair value Loans to and receivables from banks – – – – – 34 Loans to and receivables from customers – – – – 305 310 Derivative financial instruments – – 102 125 – – Marketable securities 226 305 86 – – – Miscellaneous financial assets – – – – 6 2 Measured at amortized cost Cash reserve 47 106 – – – – Loans to and receivables from banks 1,139 840 2,693 1,604 – – Loans to and receivables from customers1 – – 1,172 1,243 37,432 37,763 Current tax assets – – 2 20 – – Other assets – – 918 963 – – Derivative financial instruments designated as hedges – – 735 611 – – Total 1,412 1,251 5,708 4,566 37,744 38,110

Equity and liabilities Measured at fair value Derivative financial instruments – – 106 145 188 168 Measured at amortized cost Liabilities to banks – – 14,668 14,421 – – Liabilities to customers – – 18,537 14,384 – – Notes, commercial paper issued 42,576 43,384 19,513 17,643 – – Current tax liabilities – – 266 60 – – Other liabilities – – 161 90 8 8 Subordinated capital – – 3,284 4,435 – – Derivative financial instruments designated as hedges – – 170 114 – – Total 42,576 43,384 56,704 51,292 196 176

1 Prior­year figures have been restated (Stage 3 from €37,791 million to €37,763 million) as a result of a change to maturities and the associated correction of the fair value (see section Changes to Prior­Year Figures).

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 117

The following table shows the changes in the loans to and receivables from banks, loans to and receivables from customers, and equity investments measured at fair value and allocated to Level 3.

€ million 2020 2019

Balance as of Jan. 1 346 363 Foreign exchange differences 3 4 Changes in basis of consolidation 9 – Portfolio changes –51 –19 Measured at fair value through profit or loss 1 1 Measured at fair value through other comprehensive income 3 –3 Balance as of Dec. 31 311 346

The amounts recognized in profit or loss for loans to and receivables from banks and for loans to and receiva­ bles from customers resulting in a net gain of €1 million (previous year: net gain €1 million) have been report­ ed in the income statement under the item “Net gain or loss on financial instruments measured at fair value and on derecognition of financial assets measured at fair value through other comprehensive income”. Of the remeasurements recognized in profit or loss, a net gain of €1 million (previous year: €1 million) was attributa­ ble to loans to and receivables from banks and loans to and receivables from customers held as of the reporting date. The risk variables relevant to the fair value of the loans to and receivables from banks and the loans to and receivables from customers are risk­adjusted interest rates. A sensitivity analysis is used to quantify the impact from changes in risk­adjusted interest rates on profit or loss after tax. If risk­adjusted interest rates as of December 31, 2020 had been 100 basis points higher, profit after tax would have been €2 million (previous year: €2 million) lower. If risk­adjusted interest rates as of December 31, 2020 had been 100 basis points lower, profit after tax would have been €2 million (previous year: €2 million) higher. The risk variables relevant to the fair value of the equity investment are the growth rate within strategic planning and the cost of equity rates. If a 10% change were applied to the financial performance (which takes into account the relevant risk variables) of the equity investment measured at fair value through other com­ prehensive income, there would be no material change to equity.

The following table shows the change in derivatives measured at fair value based on Level 3 measurement.

€ million 2020 2019

Balance as of Jan. 1 168 – Foreign exchange differences –9 2 Changes in basis of consolidation – 168 Portfolio changes – – Measured at fair value through profit or loss 29 –2 Measured at fair value through other comprehensive income – – Balance as of Dec. 31 188 168

The remeasurements recognized in profit and loss amounting to €29 million (previous year: €–2 million) have been reported in the income statement under net gain or loss on financial instruments measured at fair value and on derecognition of financial assets measured at fair value through other comprehensive income. Of the

Volkswagen Financial Services AG | Annual Report 2020 118 Notes to the Consolidated Financial Statements Consolidated Financial Statements

remeasurements recognized in profit or loss, a net gain of €29 million (previous year: €–2 million ) was at­ tributable to derivatives held as of the reporting date. The risk of early termination can arise from country­specific consumer protection legislation, under which customers may have the right to return used vehicles for which a lease has been signed. The impact on earnings arising from market­related fluctuations in residual values and interest rates is borne by the VW FS AG Group. The market prices of used vehicles are the main risk variable applied to the fair value of derivatives recog­ nized in connection with the risk of early termination. A sensitivity analysis is used to quantify the impact of changes in used vehicle prices on profit or loss after tax. If the used vehicle prices of the vehicles included in the derivatives in connection with the risk of early termination had been 10% higher as of the reporting date, profit after tax would have been €86 million (previous year: €75 million) higher. If the used vehicle prices of the vehi­ cles included in the derivatives in connection with the risk of early termination had been 10% lower as of the reporting date, profit after tax would have been €123 million (previous year: €95 million) lower.

58. Offsetting of Financial Assets and Liabilities

The table below contains information about the effects of offsetting in the consolidated balance sheet and the financial effects of offsetting in the case of instruments that are subject to a legally enforceable master netting agreement or a similar arrangement. The “Financial instruments” column shows the amounts that are subject to a master netting agreement but have not been netted because the relevant criteria have not been satisfied. Most of the amounts involved are positive and negative fair values of derivatives entered into with the same counterparty. The “Collateral received/pledged” column shows the cash collateral amounts and collateral in the form of financial instruments received or pledged in connection with the total sum of assets and liabilities. It includes such collateral relating to assets and liabilities that have not been offset against each other. These items primar­ ily consist of collateral received from customers in the form of cash deposits, together with collateral pledged in the form of cash collateral from ABS transactions.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 119

AMOUNTS NOT OFFSET I N THE BALANCE SHEET

Gross amount of Net amount of financial Gross amount of recognized financial assets/liabilities recognized financial assets/liabilities offset reported in the balance Collateral assets/liabilities in the balance sheet sheet Financial Instruments received/pledged Net amount

Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, € million 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019

Assets Cash reserve 47 106 – – 47 106 – – – – 47 106 Loans to and receivables from banks 3,830 2,477 – – 3,830 2,477 – – – –34 3,830 2,443 Loans to and receivables from customers 78,625 79,172 –10 –11 78,635 79,182 – – –98 –98 78,537 79,084 Derivative financial instruments 837 736 – – 837 736 –142 –159 – – 695 577 Marketable securities 312 305 – – 312 305 – – – – 312 305 Miscellaneous financial assets 6 2 – – 6 2 – – – – 6 2 Income tax assets 2 20 – – 2 20 – – – – 2 20 Other assets 918 963 – – 918 963 – – – – 918 963 Total 84,577 83,781 –10 –11 84,587 83,792 –142 –159 –98 –132 84,347 83,501

Equity and liabilities Liabilities to banks 14,674 14,472 – – 14,674 14,472 – – –47 –55 14,627 14,417 Liabilities to customers 18,694 14,558 10 11 18,684 14,548 – – – – 18,684 14,548 Notes, commercial paper issued 61,988 60,943 – – 61,988 60,943 – – –731 –752 61,257 60,192 Derivative financial instruments 464 427 – – 464 427 –142 –159 – – 322 267 Income tax liabilities 266 60 – – 266 60 – – – – 266 60 Other liabilities 169 98 – – 169 98 – – – – 169 98 Subordinated capital 3,526 4,947 – – 3,526 4,947 – – – – 3,526 4,947 Total 99,779 95,505 10 11 99,769 95,494 –142 –159 –778 –806 98,850 94,528

Volkswagen Financial Services AG | Annual Report 2020 120 Notes to the Consolidated Financial Statements Consolidated Financial Statements

59. Default Risk

The default risk arising from financial assets is essentially the risk that a counterparty will default. The maxi­ mum amount of the risk is therefore the amount of the claims against the counterparty concerned arising from recognized carrying amounts and irrevocable credit commitments. The maximum default risk is reduced by collateral and other credit enhancements. The collateral held re­ lates to loans to and receivables from banks and customers in the classes “Measured at amortized cost”, “Meas­ ured at fair value” and “Not allocated to any measurement category”. The types of collateral held include vehi­ cles, vehicles pledged as collateral, financial guarantees, marketable securities, cash collateral and charges on real estate. In the case of financial assets with an objective indication of impairment as of the reporting date, the collat­ eral reduced the risk by €501 million (previous year: €419 million). For financial assets in the “Measured at fair value” class to which the IFRS 9 impairment requirements are not applied, the maximum credit and default risk was reduced by collateral with a value of €187 million (previous year: €273 million). For financial assets on which impairment losses were recognized during the fiscal year and that are subject to enforcement measures, the contractually outstanding amounts total €138 million (previous year: €229 million). As a consequence of the global distribution of business activities and the resulting diversification, there are no material concentrations of default risk in individual counterparties or individual markets. Sector concentra­ tions in the dealership business are a natural part of the business for a captive financial services provider in the automotive industry and these concentrations are individually analyzed in the existing risk management pro­ cesses. The loans and receivables from dealership business subject to the inherent sector concentrations de­ scribed above are included in the loans to and receivables from customers arising from dealer financing. As derivatives are only entered into with counterparties demonstrating strong credit ratings, and limits are set for each counterparty as part of the risk management system, the actual default risk arising from derivative transactions is deemed to be low. For further qualitative information, please refer to the risk report, which forms part of the management re­ port.

PROVISION FOR CREDIT RISKS Please refer to the provision for credit risks section in note (8) for disclosures on the accounting policies relating to the provision for credit risks.

The following tables show a reconciliation of the provision for credit risks relating to financial assets measured at amortized cost:

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 121

Simplified € million Stage 1 Stage 2 Stage 3 approach Stage 4 Total

Balance as of Jan. 1, 2019 315 589 334 20 31 1,289 Exchange differences on translating foreign operations 2 2 2 0 0 5 Changes in basis of consolidation 6 6 17 7 0 35 Newly extended/purchased financial assets (additions) 185 – – 6 7 197 Other changes within a stage1 47 –171 86 2 –6 –42 Transfers to Stage 1 8 –17 –4 – – –14 Stage 2 –27 40 –6 – – 7 Stage 3 –18 –36 83 – – 29 Financial instruments derecognized during the period (derecognitions) –55 –37 –41 –2 –2 –138 Utilizations – – –188 –1 –4 –193 Model or risk parameter changes –1 1 – 0 – 0 Balance as of Dec. 31, 20191 461 376 281 33 25 1,175

1 Prior­year figures have been restated due to incorrect classification in Stages 1 through 3 (Stage 1: from €–15 million to €47 million, Stage 2: from €–192 million to €–171 million and Stage 3 from €169 million to €86 million (see section Changes to Prior­Year Figures).

Simplified € million Stage 1 Stage 2 Stage 3 approach Stage 4 Total

Balance as of Jan. 1, 2020 461 376 281 33 25 1,175 Exchange differences on translating foreign operations –23 –18 –78 –1 –5 –125 Changes in basis of consolidation 14 –2 24 0 – 37 Newly extended/purchased financial assets (additions) 177 – – 9 – 186 Other changes within a stage 38 –4 98 0 3 134 Transfers to Stage 1 4 –13 –8 – – –17 Stage 2 –30 63 –4 – – 29 Stage 3 –45 –47 135 – – 43 Financial instruments derecognized during the period (derecognitions) –88 –35 –31 –9 –5 –168

Utilizations – – –100 0 –6 –107 Model or risk parameter changes 3 11 – – – 14 Balance as of Dec. 31, 2020 510 332 317 32 10 1,202

In 2020, the gross carrying amount of assets measured at amortized cost went up by €716 million to €44,345 million. At Stage 1, the gross carrying amount rose by €1,961 million to €39,434 million. This increase was mainly attributable to changes in the basis of consolidation amounting to an increase of €890 million, the transfer of gross carrying amounts into Stage 1 from other stages amounting to a net decrease of €454 million,

Volkswagen Financial Services AG | Annual Report 2020 122 Notes to the Consolidated Financial Statements Consolidated Financial Statements

other portfolio changes within Stage 1 amounting to an increase of €3,234 million and currency effects amounting to a decrease of €1,711 million. The gross carrying amount at Stage 2 fell by €531 million to €2,230 million. This was primarily attributable to other portfolio changes within Stage 2 amounting to a decrease of €394 million, the net transfer of gross carrying amounts into Stage 2 from other stages amounting to a net increase of €158 million and currency effects amounting to a decrease of €323 million. At Stage 3, the gross carrying amount declined by €21 million to €408 million. This was attributable to net transfers into Stage 3 amounting to a net increase of €208 million, currency effects amounting to a decrease of €68 million and other portfolio changes amounting to a decrease of €169 million. The gross carrying amount within the simplified approach declined by €675 million to €2,225 million. This contraction arose primarily because of portfolio changes amounting to a decrease of €608 million. At Stage 4, the gross carrying amount went down by €17 million to €47 million because of portfolio chang­ es amounting to a contraction of €8 million and currency effects amounting to a decrease of €8 million.

In 2019, the gross carrying amount of assets measured at amortized cost rose by €758 million to €43,629 million. At Stage 1, the gross carrying amount declined by €1,038 million to €37,474 million. This decrease was mainly attributable to changes in the basis of consolidation and associated consolidation effects amounting to a decrease of €2,632 million, a net transfer of gross carrying amounts from Stage 1 to other stag­ es amounting to a net decrease of €334 million, other portfolio changes within Stage 1 amounting to an in­ crease of €1,601 million and currency effects amounting to an increase of €326 million. The gross carrying amount at Stage 2 rose by €319 million to €2,761 million. This was predominantly caused by changes to the basis of consolidation, accounting for an increase of €317 million. At Stage 3, the gross carrying amount declined by €71 million to €429 million. This was attributable to net transfers into Stage 3 amounting to a net increase of €114 million and other portfolio changes amounting to a decrease of €206 million. The gross carrying amount within the simplified approach rose by €1,543 million to €2,900 million. This increase largely arose because of changes to the basis of consolidation amounting to an increase of €958 million and portfolio changes amounting to an increase of €566 million. At Stage 4, the gross carrying amount went up by €6 million to €64 million as a result of portfolio changes.

The undiscounted expected credit losses on the initial recognition of purchased or originated credit­impaired financial assets that were recognized for the first time in the reporting period amounted to €0 million (previous year: €1 million).

The provision for credit risks in respect of financial assets measured at fair value through other comprehensive income is allocated to Stage 1 and was subject to change in the reporting period only as part of other changes within Stage 1. The amount of the provision for these financial assets both in terms of the balance as of the reporting date and the prior­year reporting date and in terms of the changes in the reporting year is not mate­ rial and is therefore not presented in a separate table.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 123

The following tables show a reconciliation of the provision for credit risks relating to financial guarantees and credit commitments:

€ million Stage 1 Stage 2 Stage 3 Stage 4 Total

Balance as of Jan. 1, 2019 0 – – – 0 Exchange differences on translating foreign operations 0 0 – – 0 Changes in basis of consolidation 0 0 – – 0 Newly extended/purchased financial assets

(additions) 0 – – – 0 Other changes within a stage 0 – – – 0 Transfers to Stage 1 – – – – – Stage 2 0 0 – – 0 Stage 3 – – – – – Financial instruments derecognized during the period (derecognitions) 0 – – – 0 Utilizations – – – – – Model or risk parameter changes – – – – – Balance as of Dec. 31, 2019 0 0 – – 0

€ million Stage 1 Stage 2 Stage 3 Stage 4 Total

Balance as of Jan. 1, 2020 0 0 – – 0 Exchange differences on translating foreign

operations 0 0 – – 0 Changes in basis of consolidation – – – – – Newly extended/purchased financial assets (additions) 1 – – – 1 Other changes within a stage 0 0 – – 0 Transfers to Stage 1 – – – – – Stage 2 – – – – – Stage 3 – – – – – Financial instruments derecognized during the

period (derecognitions) 0 – – – 0 Utilizations – – – – – Model or risk parameter changes – – – – – Balance as of Dec. 31, 2020 1 0 – – 1

Volkswagen Financial Services AG | Annual Report 2020 124 Notes to the Consolidated Financial Statements Consolidated Financial Statements

The following table shows a reconciliation for the provision for credit risks relating to lease receivables in the class “Not allocated to any measurement category”:

SIMPLIFIED APPROACH

€ million 2020 2019

Balance as of Jan. 1 924 639 Exchange differences on translating foreign operations –24 9 Changes in basis of consolidation 7 175 Newly extended/purchased financial assets (additions) 224 133 Other changes 211 228 Financial instruments derecognized during the period (derecognitions) –249 –184 Utilizations –61 –47 Model or risk parameter changes 42 –30 Balance as of Dec. 31 1,074 924

As of the reporting date, the gross carrying amount of lease receivables in the class “Not allocated to any meas­ urement category” had risen by €182 million year­on­year to €41,058 million. For the most part, this increase was the result of changes to the basis of consolidation amounting to an increase of €1,038 million, portfolio changes amounting to an increase of €226 million and currency effects amounting to a decrease of €1,077 million.

As of the prior­year reporting date, the gross carrying amount of lease receivables in the class “Not allocated to any measurement category” had risen by €20,477 million year­on­year to €40,876 million. This increase largely arose because of changes to the basis of consolidation amounting to an increase of €17,866 million and portfo­ lio changes amounting to an increase of €2,358 million.

MODIFICATIONS During the reporting period and the prior­year period, there were contractual modifications of financial assets that did not lead to a derecognition of the asset concerned. These modifications were caused not only by changes in credit ratings but also, in the reporting year, by targeted measures such as payment deferrals to mitigate the economic effects of the Covid­19 pandemic on customers. In the case of financial assets for which the provision for credit risks was measured in the amount of the lifetime expected credit losses, the amortized cost before contractual modifications amounted to €444 million (previous year: €117 million). In the reporting period, the contractual modifications of these financial assets gave rise to an overall net expense of €5 million (previous year: €0 million). In the case of trade receivables and lease receivables, which are all included in the simplified approach, the only modifications that are taken into account are those in which the underlying receivables are more than 30 days past due. At the reporting date, the gross carrying amount of financial assets that had been modified since initial recognition and that, in the reporting period, had also been transferred from Stage 2 or Stage 3 to Stage 1 amounted to €80 million (previous year: €28 million). As a consequence, the measurement of the provision for credit risks for these financial assets was switched from the lifetime expected credit loss to a twelve­month expected credit loss.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 125

MAXIMUM CREDIT RISK The following table shows the maximum credit risk, broken down by class, to which the VW FS AG Group was exposed as of the reporting date and to which the impairment model was applied.

€ million Dec. 31, 2020 Dec. 31, 2019

Financial assets measured at fair value 268 258 Financial assets measured at amortized cost 43,143 42,453 Financial guarantees and credit commitments 1,303 1,329 Not allocated to any measurement category 39,984 39,951 Total 84,697 83,991

The VW FS AG Group intends to recover the following collateral accepted in the reporting period for financial assets:

€ million Dec. 31, 2020 Dec. 31, 2019

Vehicles 70 70 Real estate – – Other movable assets – – Total 70 70

The vehicles are remarketed to Volkswagen Group dealers through direct sales and auctions.

DEFAULT RISK RATING CLASSES The VW FS AG Group uses internal risk management and control systems to evaluate the credit quality of the borrower before entering into any lending contract or lease. In the retail business, this evaluation is carried out by using scoring systems, whereas rating systems are used for fleet customers and dealer financing transac­ tions. In addition, the gross carrying amounts of the financial assets are broken down into three default risk rating classes so that default risk exposures can be presented on a uniform basis throughout the Group. Loans and receivables for which the credit quality is classified as “good” are allocated to default risk rating class 1. Loans to and receivables from customers whose credit quality has not been classified as “good” but who have not yet defaulted are included under default risk rating class 2. Accordingly, all loans and receivables in default are allocated to default risk rating class 3.

Volkswagen Financial Services AG | Annual Report 2020 126 Notes to the Consolidated Financial Statements Consolidated Financial Statements

The following tables present the gross carrying amounts of financial assets broken down by default risk rating class:

FISCAL YEAR 2019

Simplified € million Stage 1 Stage 2 Stage 3 approach Stage 4

Default risk rating class 11 36,794 1,331 – 41,768 3 Default risk rating class 2 938 1,430 – 1,448 6 Default risk rating class 31 – – 429 560 55 Total1 37,731 2,761 429 43,776 64

1 Prior­year figures have been restated due to an incorrect classification in Stage 1 and 3 (Stage 1: from €36,876 million to €36,794 million, Stage 3 from €347 million to €429 million) (see section Changes to Prior­Year Figures).

FISCAL YEAR 2020

Simplified € million Stage 1 Stage 2 Stage 3 approach Stage 4

Default risk rating class 1 38,942 1,552 – 40,921 37 Default risk rating class 2 802 912 – 1,331 3 Default risk rating class 3 – – 408 755 8 Total 39,744 2,465 408 43,006 47

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 127

The following tables show the default risk exposures for financial guarantees and credit commitments broken down by default risk rating class:

FISCAL YEAR 2019

€ million Stage 1 Stage 2 Stage 3 Stage 4

Default risk rating class 1 1,326 3 – – Default risk rating class 2 0 0 – – Default risk rating class 3 – – – – Total 1,326 3 – –

FISCAL YEAR 2020

€ million Stage 1 Stage 2 Stage 3 Stage 4

Default risk rating class 1 1,301 3 – – Default risk rating class 2 0 0 – – Default risk rating class 3 – – – – Total 1,301 3 – –

Volkswagen Financial Services AG | Annual Report 2020 128 Notes to the Consolidated Financial Statements Consolidated Financial Statements

60. Liquidity Risk

Liquidity risk is defined primarily as the risk of not being able to meet payment obligations in full or when due. A rolling liquidity planning system, a liquidity reserve in the form of cash and confirmed lines of credit that can be accessed at any time at short notice, together with capital market and asset­backed securities (ABS) pro­ grams, ensure that the VW FS AG Group remains solvent and has an adequate supply of liquidity. Local cash funds in certain countries (e.g. China, Brazil, India) are only available to the Group for cross­ border transactions subject to exchange controls. Foreign exchange controls are not relevant to liquidity risk because the cash from credit lines subject to exchange controls is not used in the VW FS AG Group to safeguard the supply of liquidity other than within the countries concerned. There are otherwise no significant re­ strictions. Further details on the funding and hedging strategy can be found in the management report in the sections Liquidity Analysis (page 17) and Funding (pages 17 – 18) and in the risk report within the disclosures on inter­ est­rate risk (page 27) and liquidity risk (page 28).

The maturity profile of assets held to manage liquidity risk is as follows:

REPAYABLE ON 3 MONT HS TO MORE T HAN ASSETS DEMAND UP T O 3 MONTHS 1 YEAR 1 T O 5 YEARS 5 YEARS

Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, € million 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019

Cash reserve 47 106 47 106 – – – – – – – – Loans to and receivables from banks 3,830 2,477 3,246 1,830 365 235 19 109 68 141 132 162 Total 3,877 2,583 3,293 1,937 365 235 19 109 68 141 132 162

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 129

The following table shows the maturity profile of undiscounted cash outflows from financial liabilities:

REMAINING CONTRACTUAL MATURITIES

Cash outflows up to 3 months 3 months to 1 year 1 to 5 years more than 5 years

Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, € million 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019

Liabilities to banks 15,102 15,101 2,928 3,787 6,559 5,526 5,615 5,762 0 26 Liabilities to customers 18,848 14,639 3,939 9,021 5,516 1,491 9,122 3,878 271 249 Notes, commercial paper issued 63,345 62,488 5,945 3,160 13,615 16,035 40,792 38,927 2,993 4,365 Derivative financial instruments 6,432 5,674 2,757 1,986 1,069 1,889 2,592 1,755 14 44 Other liabilities 169 98 120 67 46 26 3 4 1 1 Subordinated capital 3,697 5,256 50 55 263 545 478 1,669 2,906 2,988 Irrevocable credit commitments 494 369 494 369 – – – – – – Total 108,087 103,625 16,233 18,445 27,067 25,512 58,601 51,996 6,185 7,673

Financial guarantees with a maximum possible drawdown of €819 million (previous year: €898 million) are always assumed to be payable on demand.

61. Market Risk

For qualitative information, please refer to the risk report within the management report. For quantitative risk measurement, interest rate and foreign currency risks are measured using a value­at­ risk (VaR) model on the basis of a historical simulation. The value­at­risk calculation indicates the size of the maximum potential loss on the portfolio as a whole within a time horizon of 40 days, measured at a confidence level of 99%. To provide the basis for this calculation, all cash flows from non­derivative and derivative financial instruments are aggregated into an interest rate gap analysis. The historical market data used in determining value at risk covers a period of 1,000 trading days.

This approach has produced the following values:

€ million Dec. 31, 2020 Dec. 31, 2019

Interest rate risk 92 80 Currency translation risk 136 62 Total market risk 132 97

As a result of correlation effects, the total market risk is not identical to the sum of the individual risks.

Volkswagen Financial Services AG | Annual Report 2020 130 Notes to the Consolidated Financial Statements Consolidated Financial Statements

62. Hedging Policy Disclosures

HEDGING POLICY AND FINANCIAL DERIVATIVES Given its international financial activities, the VW FS AG Group is exposed to fluctuations in interest rates and foreign exchange rates on international money and capital markets. The general rules governing the Group­ wide currency and interest rate hedging policy are specified in internal Group guidelines. The partners used by the Group when entering into appropriate financial transactions are national and international banks with strong credit ratings whose credit quality is continuously monitored by leading rating agencies. The Group enters into suitable hedging transactions to limit currency and interest rate risks. Regular derivative financial instruments are used for this purpose.

MARKE T RI SK Market risk arises when changes in prices on financial markets (interest rates and exchange rates) have a posi­ tive or negative effect on the value of traded products. The fair values listed in the tables in the notes were de­ termined using the market information available on the reporting date and represent the present values of the financial derivatives. They were determined on the basis of standardized techniques or quoted prices.

Interest rate risk Changes in the level of interest rates in the money and capital markets represent an interest rate risk if the funding is not maturity­matched. Interest rate risk is managed at the level of the individual company based on an overall interest rate risk limit set for the entire Group and broken down into specific limits for each compa­ ny. Interest rate risk is quantified using interest rate gap analyses to which various scenarios involving changes in interest rates are applied. The calculations take into account uniform risk ceilings applicable throughout the Group. The hedging contracts entered into by the Group mainly comprise interest rate swaps and cross­currency interest rate swaps. Micro­hedges and portfolio hedges are used for interest rate hedging. Fixed­income assets and liabilities included in this hedging strategy are recognized at fair value rather than at amortized cost, the method used in their original subsequent measurement. The resulting effects in the income statement are generally offset by the opposite effects from the corresponding gains and losses on the interest rate hedging instruments (swaps).

Currency risk The VW FS AG Group avoids currency risk by entering into currency hedging contracts, which may be currency forwards or cross­currency interest rate swaps. Generally speaking, all cash flows in foreign currency are hedged.

DESCRIPTION OF HEDGE S AND METHODOLOGIES FOR MONITORING HEDGE EFFECTIVENESS If possible, the hedge strategy aims to recognize hedges for suitable underlying transactions (hedged items) using micro­ or portfolio hedges. The vast majority of hedged items are assets or liabilities on the balance sheet. Future transactions are only used as hedged items in exceptional cases. The volume represented by the hedging instruments is generally the same as the volume represented by the designated hedged items. In the VW FS AG Group, hedges to which micro­hedge accounting is applied are normally held to maturity. In portfolio hedge accounting, derivatives are designated as hedges for interest rate hedging on a quarterly basis. Hedge effectiveness is reviewed for each maturity band. Derivatives are only included in portfolio hedge accounting for a hedging period if a high level of hedge effectiveness is achieved, both prospectively and retro­ spectively. Hedge effectiveness in the VW FS AG Group is generally measured prospectively using the critical terms match method. Hedge effectiveness is analyzed retrospectively by testing for ineffectiveness using the dollar offset method. The dollar offset method compares the changes in the value of the hedged item expressed in monetary units with the changes in the value of the hedging instrument expressed in monetary units. Hedge ineffectiveness in micro­hedge accounting largely results from differences between the mark­to­market (fair value) measurement of hedged items and that of hedging instruments. Individual yield curves are used when determining forward interest rates and prices and also when discounting future cash flows for hedged items

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 131

and hedging instruments in order to obtain a measurement in line with the market. Other factors (e.g. in rela­ tion to counterparty risk) are only of minor significance as regards hedge ineffectiveness. In portfolio hedge accounting, ineffectiveness generally arises where the changes in the fair values of hedg­ ing instruments do not fully offset those of the hedged items. In connection with hedges involving interest rate swaps or cross­currency interest rate swaps, the IBOR re­ form exposes the VW FS AG Group to uncertainty in terms of the timing and amount of the IBOR­based cash flows and of the hedged risk relating to the hedged item and hedging instrument. Regardless of the residual maturity of the hedged items and hedging instruments in hedging relationships, the VW FS AG Group makes use of the exceptions available under the amendments to the standards for all hedges affected by the aforemen­ tioned uncertainty arising from the IBOR reform. This uncertainty relates mainly to the GBP LIBOR interest rate benchmark. In the case of fair value hedges, the uncertainty relates to the ability to identify the risk component as the change in fair value for the purpose of hedging the risk of changes in the fair value of financial assets and fi­ nancial liabilities. In the case of cash flow hedges, which hedge the risk arising from changes in future cash flows, the uncertainty relates to the extent to which hedged variable future cash flows can be expected to be highly probable. The expected impact of the IBOR reform is being continuously assessed. Necessary measures have already been initiated for certain interest rate benchmarks or will be instigated in good time for others. The aim of these measures is to adapt the systems and processes in such a way that the benchmark interest rates covered by the IBOR reform can be replaced in good time by the new benchmark interest rates. The VW FS AG Group is continuing to focus its attention on the SONIA interest rate benchmark because this benchmark is already widely accepted by the market and because of the materiality of the transactions involved.

DISCLOSURES ON GAINS AND LOSSES FROM FAI R VALUE HEDGES In fair value hedges, the transactions hedge the risk of changes in the fair value of financial assets and financial liabilities. Changes in fair value that arise from the recognition of hedging instruments at fair value and those from the recognition of the associated hedged items at the hedged fair value generally have an offsetting effect and are reported under the net gain or loss on hedges.

The following table shows the degree of hedge ineffectiveness from fair value hedges broken down by type of risk, equating to the differences between the gains or losses on hedging instruments and those on hedged items:

€ million 2020 2019

Interest rate risk hedging –46 –10 Currency risk hedging –4 –9 Combined interest rate and currency risk hedging: 0 2

DISCLOSURES ON GAINS AND LOSSES FROM CASH FLOW HEDGES Cash flow hedges are recognized with the aim of hedging risks arising from changes in future cash flows. These cash flows can arise from a recognized asset or a recognized liability.

The following table covering gains and losses from cash flow hedges shows the gains and losses on hedges recognized in other comprehensive income, the hedge ineffectiveness recognized under net gain or loss on hedges, and the gains or losses arising from the reclassification of cash flow hedge reserves recognized under net gain or loss on hedges:

Volkswagen Financial Services AG | Annual Report 2020 132 Notes to the Consolidated Financial Statements Consolidated Financial Statements

€ million 2020 2019

Interest rate risk hedging Gain or loss from changes in fair value of hedged items within hedge accounting Recognized in other comprehensive income –5 –7 Recognized in profit or loss 0 0 Reclassifications from the cash flow hedge reserve to the income statement As a result of the early termination of hedges – – As a result of the recovery of the hedged item 0 – Currency risk hedging Gain or loss from changes in fair value of hedged items within hedge accounting Recognized in other comprehensive income 2 0

Recognized in profit or loss 0 0 Reclassifications from the cash flow hedge reserve to the income statement As a result of the early termination of hedges – – As a result of the recovery of the hedged item –2 0 Combined interest rate and currency risk hedging: Gain or loss from changes in fair value of hedged items within hedge accounting Recognized in other comprehensive income 37 –3 Recognized in profit or loss 0 0 Reclassifications from the cash flow hedge reserve to the income statement As a result of the early termination of hedges – – As a result of the recovery of the hedged item –38 3

In the table, effects recognized directly in equity are presented net of deferred taxes.

The gain or loss from changes in the fair value of hedges within hedge accounting equates to the basis for de­ termining hedge ineffectiveness. Those gains or losses on changes in the fair value of hedging instruments that exceed the changes in the fair value of the hedged items constitute the ineffective portion of cash flow hedges. This ineffectiveness within a hedge arises as a result of differences in the parameters applicable to the hedging instrument and the hedged item. These gains or losses are recognized immediately under the gain or loss on hedges.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 133

NOTIONAL AMOUNTS OF DERIVATIVE FINANCIAL INSTRUMENTS The following tables present a maturity analysis of the notional amounts of hedging instruments reported under the hedge accounting rules and those of derivatives to which hedge accounting is not applied:

FISCAL YEAR 2019

TOTAL NOTIONAL RESIDUAL MATURITY AMOUNT

€ million Up to 1 year 1 – 5 years more than 5 years Dec. 31, 2019

Notional amounts of hedging instruments in hedge accounting Interest rate risk hedging Interest rate swaps 8,692 28,968 4,212 41,872 Currency risk hedging Currency forwards/cross­currency swaps CZK 534 22 – 555 Currency forwards/cross­currency swaps DKK 294 – – 294 Currency forwards/cross­currency swaps PLN 128 – – 128 Currency forwards/cross­currency swaps other currencies 187 37 – 224 Combined interest rate and currency risk hedging Cross­currency interest rate swaps NOK 847 214 – 1,061 Cross­currency interest rate swaps, other foreign currencies – 256 – 256

Notional amounts of other derivatives Interest rate risk hedging Interest rate swaps 15,363 17,629 19,636 52,629 Currency risk hedging Currency forwards/cross­currency swaps 1,284 98 – 1,382 Combined interest rate and currency risk hedging Cross­currency interest rate swaps 450 989 – 1,439

Volkswagen Financial Services AG | Annual Report 2020 134 Notes to the Consolidated Financial Statements Consolidated Financial Statements

FISCAL YEAR 2020

TOTAL NOTIONAL RESIDUAL MATURITY AMOUNT

€ million Up to 1 year 1 – 5 years More than 5 years Dec. 31, 2020

Notional amounts of hedging instruments in hedge accounting Interest rate risk hedging Interest rate swaps 7,939 27,366 2,850 38,155 Currency risk hedging Currency forwards/cross­currency swaps PLN 678 – – 678 Currency forwards/cross­currency swaps CZK 503 38 – 541 Currency forwards/cross­currency swaps TRY 272 – – 272 Currency forwards/cross­currency swaps other currencies 272 24 – 296 Combined interest rate and currency risk hedging Cross­currency interest rate swaps NOK 818 331 – 1,149 Cross­currency interest rate swaps, other foreign currencies 115 186 – 301

Notional amounts of other derivatives Interest rate risk hedging Interest rate swaps 12,464 21,960 17,870 52,294 Currency risk hedging Currency forwards/cross­currency swaps 604 50 – 654 Combined interest rate and currency risk hedging Cross­currency interest rate swaps 406 1,681 – 2,087

The timings of the future payments for the hedged items in the cash flow hedges match the maturities of the hedging instruments. As of the reporting date and the prior­year reporting date, none of the cash flow hedges recognized involved a hedged item whose underlying transaction was no longer expected to occur in the future. In the reporting period, the average exchange rates used in the measurement of hedging instruments were as follows for the following currencies with significant notional amounts: NOK 10.4623, PLN 4.4738, CZK 26.3987 and TRY 9.7275. The average interest rates used for interest rate swaps and cross­currency interest rate swaps in cash flow hedges in the reporting year were as follows for the following currencies: NOK 0.46%, AUD 1.93%, JPY 0.42%, MXN 8.47% and BRL 3.18%. In the previous year, the average exchange rates used in the meas­ urement of hedging instruments were as follows for the following currencies with significant notional amounts: NOK 9.6886, PLN 4.2910, CZK 25.9257 and DKK 7.4687. The average interest rates used for interest rate swaps and cross­currency interest rate swaps in cash flow hedges in the previous year were as follows for the following currencies: NOK1 0.26%, AUD 2.08%, JPY 0.49%, MXN 8.05% BRL 5.57%. The notional amounts of hedging instruments that are exposed to the uncertainty of the IBOR reform de­ scribed above amount to a total of €9,228 (previous year: €17,836 million). In the reporting year, most of the notional amounts were accounted for by the GBP LIBOR: €9,147 million (previous year: €12,865 million). In contrast to the previous year, it is believed that the notional amounts of hedging instruments subject to the AUD BBSW and NOK OIBOR are no longer subject to any uncertainty from the IBOR reform.

1 Currency disclosures corrected (see section Changes to Prior­Year Figures)

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 135

DISCLOSURES ON HEDGI NG INSTRUMENTS USED IN HEDGE ACCOUNTING The VW FS AG Group regularly uses hedging instruments to hedge changes in the fair value of financial assets and financial liabilities.

The following overviews show the notional amounts, fair values and changes in fair value used to determine ineffectiveness in hedging instruments used in fair value hedges to hedge the risk arising from changes in fair value:

FISCAL YEAR 2019

Derivative Derivative financial financial Fair value change instruments – instruments – to determine € million Notional amount assets liabilities ineffectiveness

Interest rate risk hedging Interest rate swaps 39,924 580 78 405 Currency risk hedging Currency forwards/cross­currency swaps 1,137 2 14 –12 Combined interest rate and currency risk hedging Cross­currency interest rate swaps 175 7 0 7

FISCAL YEAR 2020

Derivative Derivative financial financial Fair value change instruments – instruments – to determine € million Notional amount assets liabilities ineffectiveness

Interest rate risk hedging Interest rate swaps 36,645 686 108 436 Currency risk hedging Currency forwards/cross­currency swaps 1,696 14 23 –13 Combined interest rate and currency risk hedging Cross­currency interest rate swaps 99 2 2 0

The VW FS AG Group also uses hedging instruments to hedge the risk arising from changes in future cash flows.

Volkswagen Financial Services AG | Annual Report 2020 136 Notes to the Consolidated Financial Statements Consolidated Financial Statements

The following tables set out the notional amounts, fair values and changes in fair value used to determine inef­ fectiveness in hedging instruments used in cash flow hedges:

FISCAL YEAR 2019

Derivative Derivative financial financial Fair value change instruments – instruments – to determine € million Notional amount assets liabilities ineffectiveness

Interest rate risk hedging Interest rate swaps 1,948 1 12 –8 Currency risk hedging Currency forwards/cross­currency swaps 64 0 0 0 Combined interest rate and currency risk hedging Cross­currency interest rate swaps 1,143 21 9 15

FISCAL YEAR 2020

Derivative Derivative financial financial Fair value change instruments – instruments – to determine € million Notional amount assets liabilities ineffectiveness

Interest rate risk hedging Interest rate swaps 1,510 – 15 –17 Currency risk hedging Currency forwards/cross­currency swaps 90 1 0 2 Combined interest rate and currency risk hedging Cross­currency interest rate swaps 1,351 32 21 10

The change in fair value used to determine ineffectiveness equates to the change in the fair value of the desig­ nated components of the hedging instruments.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 137

DISCLOSURES ON HEDGE D ITEMS TO WHICH HEDGE ACCOUNTING IS APP LIED Disclosures on hedged items, broken down by risk category and type of designation, are required in addition to the disclosures on hedging instruments.

The tables below show the hedged items hedged in fair value hedges:

FISCAL YEAR 2019

Hedge adjustments Cumulative hedge Cumulative hedge current adjustments from € million Carrying amount adjustments period/fiscal year terminated hedges

Interest rate risk hedging Loans to and receivables from banks – – – – Loans to and receivables from customers 11,238 –3 –3 – Liabilities to banks – – – – Liabilities to customers 810 4 –1 – Notes, commercial paper issued 24,845 343 165 – Subordinated capital – – – –

Currency risk hedging Loans to and receivables from banks – – – – Loans to and receivables from customers 465 0 0 – Liabilities to banks 27 –1 0 – Liabilities to customers – – – – Notes, commercial paper issued – – – – Subordinated capital – – – –

Combined interest rate and currency risk hedging: Loans to and receivables from banks – – – – Loans to and receivables from customers 127 –7 1 – Liabilities to banks – – – – Liabilities to customers – – – – Notes, commercial paper issued 48 3 3 – Subordinated capital – – – –

Volkswagen Financial Services AG | Annual Report 2020 138 Notes to the Consolidated Financial Statements Consolidated Financial Statements

FISCAL YEAR 2020

Hedge adjustments Cumulative hedge Cumulative hedge current adjustments from € million Carrying amount adjustments period/fiscal year terminated hedges

Interest rate risk hedging: Loans to and receivables from banks – – – – Loans to and receivables from customers 19,059 16 12 0 Liabilities to banks – – – – Liabilities to customers 813 16 6 – Notes, commercial paper issued 23,161 629 334 – Subordinated capital – – – –

Currency risk hedging: Loans to and receivables from banks – – – – Loans to and receivables from customers 528 17 17 – Liabilities to banks 23 –4 –3 – Liabilities to customers – – – – Notes, commercial paper issued – – – – Subordinated capital – – – –

Combined interest rate and currency risk hedging: Loans to and receivables from banks – – – – Loans to and receivables from customers – – – – Liabilities to banks – – – – Liabilities to customers 49 –3 –3 – Notes, commercial paper issued 50 5 5 – Subordinated capital – – – –

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 139

The following tables present the hedged items hedged in cash flow hedges:

FISCAL YEAR 2019

RESERVE FOR

Fair value change to determine Existing cash flow Terminated cash € million ineffectiveness hedges flow hedges

Interest rate risk hedging Designated components –6 –8 0

Deferred taxes – 3 0 Total interest rate risk –6 –5 0 Currency risk hedging Designated components 0 0 – Non­designated components – 0 –

Deferred taxes – 0 – Total hedging currency risk 0 0 – Combined interest rate and currency risk hedging: Designated components 15 1 –

Deferred taxes – 0 – Total combined interest rate and currency risk 15 0 –

FISCAL YEAR 2020

RESERVE FOR

Fair value change to determine Existing cash flow Terminated cash € million ineffectiveness hedges flow hedges

Interest rate risk hedging Designated components –12 –15 – Deferred taxes – 5 – Total interest rate risk –12 –10 – Currency risk hedging

Designated components 1 0 –

Non­designated components – 0 – Deferred taxes – 0 –

Total hedging currency risk 1 0 – Combined interest rate and currency risk hedging: Designated components 5 0 –

Deferred taxes – 0 –

Total combined interest rate and currency risk 5 0 –

Volkswagen Financial Services AG | Annual Report 2020 140 Notes to the Consolidated Financial Statements Consolidated Financial Statements

CHANGES IN THE CASH FLOW HEDGE RESERVE In the accounting treatment of cash flow hedges, the designated effective portion of a hedge is reported in other comprehensive income (in “OCI I”). All changes in the fair value of hedging instruments in excess of the effective portion are reported in profit or loss as hedge ineffectiveness.

The following tables show a reconciliation for the cash flow hedge reserve (OCI I):

Combined interest rate and currency € million Interest rate risk Currency risk risk Total

Balance as of Jan. 1, 2019 2 0 1 3

Gains or losses from effective hedges –7 0 –3 –11 Reclassifications resulting from the recovery of the hedged item – 0 3 3

Balance as of Dec. 31, 2019 –5 0 0 –5

Combined interest rate and currency € million Interest rate risk Currency risk risk Total

Balance as of Jan. 1, 2020 –5 0 0 –5 Gains or losses from effective hedges –5 2 37 35

Reclassifications resulting from the recovery of the hedged item 0 –2 –38 –40

Balance as of Dec. 31, 2020 –10 0 0 –10

The changes in the fair value of non­designated forward components in currency forwards and in currency hedging within cash flow hedges are initially reported in other comprehensive income (hedging costs) in the VW FS AG Group. Therefore, changes in the fair value of non­designated components (or parts thereof) are reported immediately in profit or loss only if they relate to ineffective portions of the hedge.

The following table presents an overview of the changes in the hedging costs reserve arising from the non­ designated components of currency hedges:

CURRENCY RISK

€ million 2020 2019

Balance as of Jan. 1 0 – Gains and losses from undesignated forward elements and CCBS

Hedged item is recognized at a point in time 0 0 Reclassification due to realization of the hedged item

Hedged item is recognized at a point in time 0 0 Reclassification due to changes in whether the hedged item is expected to occur Hedged item is recognized at a point in time – –

Balance as of Dec. 31 0 0

In the tables, the effects reported in equity are reduced by deferred taxes.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 141

Segment Reporting

63. Breakdown by Geographical Market

The delineation between segments follows that used for internal management and reporting purposes in the VW FS AG Group. The operating result is reported as the primary key performance indicator to the chief operat­ ing decision­makers. The information made available to management for management purposes is based on the same accounting policies as those used for external financial reporting. Internal management applies a market­based geographical breakdown. Foreign branches of German subsid­ iaries are allocated to the markets in which they are based. The geographical markets of Germany, the United Kingdom, Sweden, China, Brazil and Mexico are the segments that are reportable under IFRS 8. Subsidiaries in the VW FS AG Group are aggregated within these segments. In line with internal reporting practice, the German market is composed of companies in Germany and Austria. All other companies that can be allocated to geo­ graphical markets are brought together under “Other Segments”. Companies that are not allocated to any geographical market are reported in the reconciliation. The recon­ ciliation also includes the VW FS AG holding company, the holding and financing companies in the Netherlands and Belgium, EURO Leasing companies in Germany and Poland, Volkswagen Insurance Brokers GmbH, Volim Volkswagen Immobilien Vermietgesellschaft für VW­/Audi­Händlerbetriebe mbH and Volkswagen Versicherung AG. In the internal reporting structure, this presentation ensures that there is a sepa­ ration between market activities on one side and typical holding company or financing functions, industry business, primary insurance business and reinsurance business on the other side. Effects from consolidation between the segments and from the provision for country risks are additionally included in the reconciliation. All business transactions between the segments – where such transactions take place – are conducted on an arm’s­length basis. In accordance with IFRS 8, noncurrent assets are reported exclusive of financial instruments, deferred tax assets, post­employment benefits and rights under insurance contracts.

Volkswagen Financial Services AG | Annual Report 2020 142 Notes to the Consolidated Financial Statements Consolidated Financial Statements

BREAKDOWN BY GEOGRAP HICAL MARKET 2019:

J AN. 1 – DEC. 31, 2019

United Other Segments Recon­ € million Germany Kingdom Sweden China Brazil Mexico1 segments total ciliation Group

Interest income from lending transactions and marketable securities in respect of third parties1 11 6 12 726 515 283 488 2,042 53 2,094 Income from leasing transactions with third parties1 8,767 1,901 1,497 – 11 313 1,623 14,112 182 14,294 of which impairment losses in accordance with IAS 36 67 25 2 – 0 6 19 119 0 119 Intersegment income from leasing transactions – – – – – – 1 1 –1 – Depreciation, impairment losses and other expenses from leasing transactions –8,059 –1,168 –1,455 – –5 –195 –1,350 –12,232 –145 –12,378 of which impairment losses in accordance with IAS 36 –226 –4 0 – 0 – –91 –322 –1 –324 Net income from leasing transactions1 708 732 42 – 6 117 274 1,880 36 1,917 Interest expense –152 –240 –8 –269 –218 –170 –282 –1,339 –13 –1,352 Income from service contracts with third parties 1,257 102 – – 1 – 346 1,706 31 1,738 Intersegment income from service contracts – – – – – – – – – – Income from insurance business with third parties – – – – – – – – 318 318 Intersegment income from insurance business – – – – – – – – – – Fee and commission income from third parties 156 4 1 – 80 56 176 474 40 514 Intersegment fee and commission income – – – – – – – – – – Other amortization, depreciation and impairment losses –2 –3 –1 –8 –5 0 –24 –43 –27 –70 Operating result2 232 236 21 169 136 128 333 1,255 –33 1,223

1 Prior­year figures have been restated (see section Changes to Prior­Year Figures). 2 Prior­year figures have been adjusted as a result of internal structural changes.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 143

BREAKDOWN BY GEOGRAP HICAL MARKET 2020:

J AN. 1 – DEC. 31, 20 20

United Other Segments Recon­ € million Germany Kingdom Sweden China Brazil Mexico segments total ciliation Group

Interest income from lending transactions and marketable securities in respect of third parties 12 7 30 838 400 223 456 1,964 31 1,995 Income from leasing transactions with third parties 9,388 2,389 3,104 1 7 252 2,171 17,312 145 17,457 of which impairment losses in accordance with IAS 36 27 0 2 – 0 3 23 54 0 54 Intersegment income from leasing transactions – – – – – – 2 2 –2 – Depreciation, impairment losses and other expenses from leasing transactions –8,822 –1,466 –2,995 –1 –4 –163 –1,879 –15,329 –122 –15,450 of which impairment losses in accordance with IAS 36 –369 –9 –3 0 0 0 –112 –492 –6 –498 Net income from leasing transactions 566 923 110 0 3 89 294 1,985 22 2,006 Interest expense –206 –290 –25 –284 –134 –111 –249 –1,299 14 –1,286 Income from service contracts with third parties 1,391 140 – 0 0 0 547 2,079 21 2,100 Intersegment income from service contracts – – – – – – – – – – Income from insurance business with third parties – – – – – – – – 345 345 Intersegment income from insurance business – – – – – – – – – – Fee and commission income from third parties 136 5 5 – 61 47 260 513 47 560 Intersegment fee and commission income – – – – – – – – – – Other amortization, depreciation and impairment losses –3 –4 –1 –10 –3 0 –29 –51 –26 –78 Operating result 225 334 64 158 108 107 271 1,267 –44 1,223

Information on the main products (lending and leasing business) can be taken directly from the income state­ ment.

The breakdown of noncurrent assets in accordance with IFRS 8 and of the additions to noncurrent lease assets by geographical market is shown in the following tables:

J AN. 1 – DEC. 31, 2019

€ million Germany United Kingdom Sweden China Brazil Mexico

Noncurrent Assets 13,069 3,185 1,119 26 258 43 Additions to lease assets classified as noncurrent assets. 6,737 940 236 – 0 1

Volkswagen Financial Services AG | Annual Report 2020 144 Notes to the Consolidated Financial Statements Consolidated Financial Statements

J AN. 1 – DEC. 31, 2020

€ million Germany United Kingdom Sweden China Brazil Mexico

Noncurrent Assets 15,558 2,961 1,503 73 193 33 Additions to lease assets classified as noncurrent assets 8,593 1,317 545 – – 1

Investment recognized under other assets was of minor significance.

The following table shows the reconciliation to consolidated revenue, consolidated operating result and consol­ idated profit before tax.

€ million 2020 2019

Segment revenue1 21,868 18,334 Other companies 621 586 Consolidation –376 –280 Group revenue1 22,112 18,640

Segment profit or loss (operating result)2 1,267 1,255 Other companies –47 –86 Contribution to operating profit by included companies2 –15 –47 Consolidation 18 101 Operating result 1,223 1,223 Share of profits and losses of equity­accounted joint ventures 64 65 Net gain or loss on miscellaneous financial assets –168 –14 Other financial gains or losses –81 –9 Profit before tax 1,038 1,264

1 Prior­year figures have been restated (see section Changes to Prior­Year Figures). 2 Prior­year figures have been adjusted as a result of internal structural changes.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 145

Other Disclosures

64. Leases

LESSOR ACCOUNTING FO R FINANCE LEASES In the reporting year, interest income from the net investment in the lease amounting to €1,786 million (previ­ ous year: €1,494 million1) was generated from finance leases. There was no income from variable lease pay­ ments that was not taken into account in the measurement of the net investment in the lease where finance leases were concerned.

The following table shows a reconciliation of the undiscounted lease payments under finance leases to the net investment in the leases.

€ million Dec. 31, 2020 Dec. 31, 2019

Non­discounted lease payments2 43,145 43,268 Non­guaranteed residual value 190 170 Unearned interest income –2,658 –2,849 Loss allowance on lease receivables2 –1,002 –872 Other – – Net investment 39,675 39,717

2 Prior­year figures restated because some of the credit risk provisions had not been included. Each of the restated figures increased by €192 million. The restatement does not have any effect on the net investment (see section Changes to Prior­Year Figures).

In the VW FS AG Group, net investment equates to the net receivables from finance leases.

In the previous year, the following payments were anticipated over the subsequent years from expected, out­ standing, non­discounted lease payments under finance leases.

€ million 2020 2021 2022 2023 2024 From 2025 Total

Finance lease payments3 14,645 11,599 10,152 6,051 612 209 43,268

3 Prior­year figures restated because some of the credit risk provisions had not been included. Each of the restated figures increased by €192 million. The restatement does not have any effect on the net investment (see section Changes to Prior­Year Figures).

1 Prior­year figure corrected from €1,504 million to €1,494 million (see section Changes to Prior­Year Figures).

Volkswagen Financial Services AG | Annual Report 2020 146 Notes to the Consolidated Financial Statements Consolidated Financial Statements

In the year under review, the following payments are anticipated over the next few years from expected, out­ standing, non­discounted lease payments under finance leases.

€ million 2021 2022 2023 2024 2025 From 2026 Total

Lease payments 14,849 12,530 10,265 4,884 364 254 43,145

LESSOR ACCOUNTING FO R OPERATING LEASES Income generated from operating leases is included in the income from leasing transactions and other operat­ ing income line items in the income statement. The following table shows a breakdown between income from leases without variable lease payments and income from leases with variable lease payments.

€ million 2020 2019

Lease income1 5,444 4,466 Income from variable lease payments – – Total1 5,444 4,466

1 Prior­year figure restated from €4,464 million to €4,466 million. Rental income from investment property had not been included in the previous year (see section Changes to Prior­Year Figures).

The impairment losses recognized as a result of the impairment test on lease assets amounted to €498 million (previous year: €324 million) and are included in the depreciation, impairment losses and other expenses from leasing transactions. Impairment losses are based on continuously updated internal and external information, which is then fed into the forecasts of residual values for vehicles. Income from reversals of impairment losses on lease assets applied in prior years amounted to €54 million (previous year: €119 million) and is included in income from leasing business.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 147

The following table shows the changes in the prior year for assets leased out under operating leases:

Movable lease € million assets

Cost as of Jan. 1, 2019 18,029 Foreign exchange differences 87 Changes in basis of consolidation 7,576 Additions 14,157 Reclassifications 2 Disposals 10,427 Balance as of Dec. 31, 2019 29,425 Depreciation and impairment losses as of Jan. 1, 2019 4,385 Foreign exchange differences 14 Changes in basis of consolidation 1,687 Additions to cumulative depreciation 3,182 Additions to cumulative impairment losses 324 Reclassifications 0 Disposals 2,825 Reversal of impairment losses 119 Balance as of Dec. 31, 2019 6,649 Net carrying amount as of Dec. 31, 2019 22,776 Net carrying amount as of Jan. 1, 2019 13,644

In the previous year, the outstanding, undiscounted lease payments from operating leases expected for subse­ quent years were as follows:

€ million 2020 2021 2022 2023 2024 From 2025 Total

Lease payments 3,516 2,166 985 302 148 7 7,125

Volkswagen Financial Services AG | Annual Report 2020 148 Notes to the Consolidated Financial Statements Consolidated Financial Statements

The following table shows the changes in the reporting year for assets leased out under operating leases:

Movable lease € million assets

Cost as of Jan. 1, 2020 29,425 Foreign exchange differences –252 Changes in basis of consolidation 16 Additions 18,354 Reclassifications – Disposals 12,476 Balance as of Dec. 31, 2020 35,067 Depreciation and impairment losses as of Jan. 1, 2020 6,649 Foreign exchange differences –66 Changes in basis of consolidation 3 Additions to cumulative depreciation 4,030 Additions to cumulative impairment losses 498 Reclassifications – Disposals 3,304 Reversal of impairment losses 54 Balance as of Dec. 31, 2020 7,756 Net carrying amount as of Dec. 31, 2020 27,311 Net carrying amount as of Jan. 1, 2020 22,776

From the perspective of the VW FS AG Group as lessor, the value of the right of use under noncurrent leases recognized in connection with buyback transactions is presented under the lease assets item in the balance sheet.

In the reporting year, the outstanding, undiscounted lease payments from operating leases expected for subse­ quent years were as follows:

€ million 2021 2022 2023 2024 2025 From 2026 Total

Lease payments 3,756 2,486 1,212 568 116 13 8,151

The minimum lease payments expected in the reporting year from subleases in connection with buyback transactions are included in the presentation of the outstanding, undiscounted lease payments from operating leases.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 149

LESSEE ACCOUNTING The VW FS AG Group is a party to leases as a lessee in various aspects of the business. These leases mainly in­ volve the leasing of land and buildings and operating and office equipment. In the reporting year, interest expenses of €5 million (previous year: €6 million) were recognized under the interest expenses line item in the income statement in respect of lease liabilities reported under liabilities to customers on the balance sheet. The subleasing of right­of­use assets gave rise to income of €575 million (previous year: €562 million) in the reporting year. No right­of­use assets are recognized for short­term leases or leases in which the underlying asset is of low value. In the reporting year, expenses for leases in which the underlying assets are of low value amounted to €7 million (previous year: €5 million). Expenses for short­term leases were €7 million (previous year: €8 million). There were no variable lease expenses in the reporting year that were not taken into account in the measurement of the lease liabilities.

Right­of­use assets derived from leases are reported in the balance sheet of the VW FS AG Group within proper­ ty and equipment under the following items:

Right of use on land, land Right of use on other rights and buildings incl. equipment, operational and € million buildings on third party land office equipment Total

Gross carrying amount (or cost) as of Jan. 1, 2019 109 9 118 Foreign exchange differences 1 0 1 Changes in basis of consolidation 53 0 53 Additions 45 2 47 Reclassifications – – – Disposals 13 5 18 Balance as of Dec. 31, 2019 194 6 200 Depreciation and impairment losses as of Jan. 1, 2019 0 – 0

Foreign exchange differences 0 0 0 Changes in basis of consolidation 1 0 1 Additions to cumulative depreciation 22 4 25 Additions to cumulative impairment losses – 0 0 Reclassifications – – – Disposals 0 1 1

Reversal of impairment losses – 0 0 Balance as of Dec. 31, 2019 22 3 25 Net carrying amount as of Dec. 31, 2019 172 3 175

Volkswagen Financial Services AG | Annual Report 2020 150 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Right of use on land, land Right of use on other rights and buildings incl. equipment, operational and € million buildings on third party land office equipment Total

Gross carrying amount (or cost) as of Jan. 1, 2020 194 6 200 Foreign exchange differences –9 0 –9 Changes in basis of consolidation 0 0 1 Additions 50 2 52 Reclassifications – – – Disposals 20 1 21 Balance as of Dec. 31, 2020 216 7 223 Depreciation and impairment losses as of Jan. 1, 2020 22 3 25 Foreign exchange differences –2 0 –2 Changes in basis of consolidation – – – Additions to cumulative depreciation 25 2 27 Additions to cumulative impairment losses – – – Reclassifications – – – Disposals 3 1 4 Reversal of impairment losses 0 – 0 Balance as of Dec. 31, 2020 43 4 47 Net carrying amount as of Dec. 31, 2020 173 3 176

The values of the rights of use under noncurrent leases recognized in connection with buyback transactions under lease assets in the balance sheet are presented as part of the disclosures on lessor accounting for operat­ ing leases. When assessing the lease term underlying a lease liability, the VW FS AG Group makes a best estimate as to whether an extension option will be exercised or a termination option will not be exercised. In the event of a material change in the general parameters used for this estimate or a modification of the lease, this estimate is updated.

In the balance sheet, lease liabilities are reported under liabilities to customers. The following table shows a breakdown of the contractual maturities of lease liabilities:

REMAINING CONTRACTUAL MATURITIES

€ million Up to 1 year 1 – 5 years more than 5 years Total

Lease liabilities as of Dec. 31, 2020 25 102 63 190 Lease liabilities as of Dec. 31, 2019 23 67 91 181

Overall, leases in which the VW FS AG Group is a lessee gave rise to total cash outflows of €669 million (previous year: €691 million) in the reporting year. In the case of assets leased in as part of buyback transactions, the total cash outflows were reported in an amount equating to the value of the right of use recognized in the reporting year.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 151

The following table shows an overview of the potential future cash outflows that have not been included in the measurement of the lease liabilities.

€ million 2020 2019

Future cash outflows to which the lessee is potentially exposed Variable lease payments – – Residual value guarantees 0 0 Extension options 26 49 Termination options – – Obligations under leases not yet commenced (contractual obligations) 5 19 Total1 31 68

1 Prior­year figure restated from €69 million to €68 million as a result of a rounding correction (see section Changes to Prior­Year Figure).

65. Cash Flow Statement

VW FS AG Group’s cash flow statement documents changes in cash and cash equivalents attributable to cash flows from operating, investing and financing activities. Cash flows from investing activities comprise purchase payments and disposal proceeds relating to investment property, subsidiaries, joint ventures and other assets. Cash flows from financing activities reflect all cash flows arising from transactions involving equity, subordi­ nated capital and other financing activities. All other cash flows are classified as cash flows from operating activities in accordance with standard international practice for financial services companies. The narrow definition of cash and cash equivalents comprises only the cash reserve, which consists of cash­ in­hand and central bank balances. The changes in the balance sheet items used to determine the changes in the cash flow statement cannot be derived directly from the balance sheet because effects from the changes in the basis of consolidation have no impact on cash and are eliminated.

Volkswagen Financial Services AG | Annual Report 2020 152 Notes to the Consolidated Financial Statements Consolidated Financial Statements

The prior­year figures have been adjusted in accordance with the disclosures in the section Changes to Prior­ Year Figures, as follows:

€ million Before adjustment Adjustment After adjustment

Profit after tax 890 –890 – Profit before tax – 1,264 1,264 Change in other noncash items 102 –374 –272 Change in liabilities to customers –124 –9 –133 Cash flows from operating activities 347 –9 338

Proceeds from disposal of other assets 27 –17 10 Acquisition of other assets –115 47 –68 Cash flows from investing activities –284 30 –254

Repayment of liabilities arising from leases – –21 –21 Cash flows from financing activities –17 –21 –38

The following tables show the breakdown of the changes in subordinated capital (as part of financing activities) into cash and noncash transactions for the reporting year and the prior year.

NONCASH TRANSACTIONS

Balance as of Jan. Exchange rate Changes in basis Measurement Balance as of Dec. € million 1, 2019 Cash changes changes of consolidation changes 31, 2019

Subordinated capital 3,023 –166 8 2,081 – 4,947

NONCASH TRANSACTIONS

Balance as of Jan. Exchange rate Changes in basis Measurement Balance as of Dec. € million 1, 2020 Cash changes changes of consolidation changes 31, 2020

Subordinated capital 4,947 –1,268 –153 – – 3,526

66. Off­Balance­Sheet Liabilities

CONTINGENT LIABILITI ES The contingent liabilities of €296 million (previous year: €374 million) largely relate to legal disputes concern­ ing tax matters in which the criteria for the recognition of a provision in accordance with IAS 37 are not satis­ fied. After an analysis of the individual cases covered by the contingent liabilities, it is believed that the disclo­ sure of further detailed information on individual proceedings, legal disputes and legal risks could seriously prejudice the course of those proceedings. The outflow of economic resources in connection with contingent liabilities based on trust assets and liabilities of the savings and trust entity belonging to the Latin American subsidiaries that are not included in the consol­

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 153

idated balance sheet (previous year: €419 million) is deemed to be unlikely in the current fiscal year and is therefore no longer disclosed.

OTHER FINANCIAL OBLI GATIONS

DUE DUE DUE TOTAL

€ million 2020 2021 – 2024 From 2025 Dec. 31, 2019

Purchase commitments in respect of Property and equipment 10 – – 10 Intangible assets 2 – – 2 Investment property – – – –

Obligations from Irrevocable credit commitments to customers 369 – – 369 Long­term leasing and rental contracts 6 1 1 8

Miscellaneous financial obligations 48 1 – 49

DUE DUE DUE TOTAL

€ million 2021 2022 – 025 From 2026 Dec. 31, 2020

Purchase commitments in respect of Property and equipment 4 – – 4 Intangible assets 0 – – 0 Investment property – – – –

Obligations from Irrevocable credit commitments to customers 494 – – 494 Long­term leasing and rental contracts 9 1 0 11

Miscellaneous financial obligations 55 0 – 55

In the case of irrevocable credit commitments, the Company expects the customers to draw down the facilities concerned.

Volkswagen Financial Services AG | Annual Report 2020 154 Notes to the Consolidated Financial Statements Consolidated Financial Statements

67. Average Number of Employees During the Reporting Period

2020 2019

Salaried employees 10,654 10,322 Vocational trainees 149 143 Total 10,803 10,465

68. Benefits Based on Performance Shares (Share­Based Payment)

At the end of 2018, the Supervisory Board of VW FS AG resolved to adjust the remuneration system of the Board of Management with effect from January 1, 2019. The remuneration system of the Board of Management com­ prises non­performance­related and performance­related components. The performance­related remuneration consists of an annual bonus with a one­year assessment period and a long­term incentive (LTI) in the form of a performance share plan with a forward­looking three­year term. Since the end of 2018, the beneficiaries of the performance share plan have included other top management members in addition to the members of the Board of Management. At the end of 2019, the group of beneficiar­ ies was extended to include all other members of management as well as selected beneficiaries below manage­ ment level. Top management members were granted performance shares for the first time at the beginning of 2019. All other beneficiaries were granted benefits on the basis of performance shares for the first time at the beginning of 2020. The way the performance share plan granted to these beneficiaries works is essentially the same as the performance share plan used for members of the Board of Management. At the introduction of the performance share plan, top management members were guaranteed a minimum bonus amount for the first three years on the basis of remuneration in 2018, whereas all other beneficiaries were given a guarantee for the first three years on the basis of remuneration in 2019. Each performance period of the performance share plan has a term of three years. For the members of the Board of Management and top management, the annual target amount under the LTI is converted, at the time the LTI is granted, on the basis of the initial reference price of Volkswagen’s preferred shares into performance shares of Volkswagen AG, which are allocated to the beneficiaries purely for calculation purposes. The number of performance shares is determined definitively on the basis of a three­year forward­looking performance period according to the degree of target attainment for the annual earnings per Volkswagen preferred share. Settlement is in cash at the end of the performance period. The payment amount corresponds to the number of determined performance shares, multiplied by the closing reference price at the end of the period plus a divi­ dend equivalent. For all other beneficiaries, the payout amount is determined by multiplying the target amount by the degree of target attainment for the annual earnings per Volkswagen preferred share and the ratio be­ tween the closing reference price at the end of the period (plus a dividend equivalent) and the initial reference price. The target attainment is determined on the basis of a three­year performance period with a one­year forward reference. In a deviation from this approach, the target attainment was initially determined in 2020 on the basis of a one­year forward­looking performance period and in 2021 will be on the basis of a two­year per­ formance period with a one­year forward reference. The payment amount for all beneficiaries under the per­ formance share plan is limited to 200% of the target amount; the payment amount is reduced by 20% if the average capital expenditure ratio or the R&D ratio in the Automotive Division during the performance period is lower than 5%.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 155

MEMBERS OF THE BOARD OF MANAGEMENT AND TOP MANAGEMENT

€ million Dec. 31, 2020 Dec. 31, 2019

Total expense for the period (Jan. 1 – Dec. 31) 4 4 Total carrying amount of the obligation 4 4 Intrinsic value of the liabilities 4 4 Fair value at grant date 3 2 Number of performance shares granted 34,705 15,119 of which: number granted in the reporting period 17,490 15,119

MANAGEMENT MEMBERS A ND SELECTED BENEFICI ARIES BELOW MANAGEME NT L E V E L In the reporting year, all other beneficiaries were granted a target amount, based on target attainment of 100%, of €26 million (previous year: €26 million). As of December 31, 2020, the total carrying amount of the obliga­ tion, which equated to the intrinsic value of the liabilities, amounted to €35 million. A total expense of €35 million was recognized in the reporting period for this commitment.

69. Related Party Disclosures

Related parties within the meaning of IAS 24 are deemed to be individuals or entities who can be influenced by VW FS AG, who can exercise an influence over VW FS AG, or who are under the influence of another related party of VW FS AG. Volkswagen AG, Wolfsburg, is the sole shareholder of VW FS AG. Porsche Automobil Holding SE, Stuttgart, held the majority of the voting rights in Volkswagen AG as of the reporting date. The Extraordinary General Meeting of Volkswagen AG held on December 3, 2009 approved the creation of rights of appointment for the State of Lower Saxony. As a result, Porsche SE cannot elect, via the Annual General Meeting, all the shareholder representatives on Volkswagen AG’s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of Volkswagen AG’s ordinary shares. However, Porsche SE has the power to participate in the operating policy decisions of the Volkswagen Group and is therefore deemed to be a related party as defined by IAS 24. According to a notification dated January 4, 2021, the State of Lower Saxony and Hannoversche Be­ teiligungsgesellschaft mbH, Hanover, held 20.00% of the voting rights in Volkswagen AG on December 31, 2020 and therefore indirectly had significant influence over the VW FS AG Group. As mentioned above, the General Meeting of Volkswagen AG on December 3, 2009 also resolved that the State of Lower Saxony may appoint two members of the Supervisory Board (right of appointment).

VW FS AG and its sole shareholder Volkswagen AG have a control and profit­and­loss transfer agreement. Volkswagen AG and other related parties in Volkswagen AG’s group of consolidated entities provide the en­ tities in the VW FS AG Group with funding on an arm’s­length basis. As part of funding transactions, Volkswagen AG and other related parties in Volkswagen AG’s group of consolidated entities sold vehicles to entities in the VW FS AG Group on an arm’s­length basis. These transactions are presented in the “Goods and services received” line item. Volkswagen AG and its subsidiaries have also furnished collateral for the benefit of VW FS AG within the scope of the operating business. The “Goods and services provided” line item primarily contains income from leasing transactions.

Volkswagen Financial Services AG | Annual Report 2020 156 Notes to the Consolidated Financial Statements Consolidated Financial Statements

The business transactions with unconsolidated subsidiaries, joint ventures and associates of VW FS AG mainly relate to the provision of funding and services. These transactions are always conducted on an arm’s­length basis, e.g. when using the cost plus method for the provision of services.

The two tables below show the transactions with related parties. In these tables, the exchange rates used are the closing rate for asset and liability items, and the weighted average rates for the year for income statement items.

FISCAL YEAR 2019

Other related parties in the Non­ Supervisory Board of Volkswagen consolidated consolidated Joint € million Board Management AG Porsche SE entities1 subsidiaries ventures Associates1

Loans and Receivables – – 3,241 0 6,409 226 6,054 – Valuation allowances on impaired loans and receivables – – – – – – – – of which additions in current year – – – – – – – – Obligations – – 8,523 – 10,685 193 170 – Interest income – – 2 – 122 6 92 – Interest expense – – –17 – –148 –1 – – Goods and services provided 0 – 1,091 0 2,987 22 426 1 Goods and services received – – 9,903 – 6,681 36 486 0

1 Separate presentation of associated companies. Prior­year figures have been adjusted.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 157

FISCAL YEAR 2020

Other related parties in the Non­ Supervisory Board of Volkswagen consolidated consolidated Joint € million Board Management AG Porsche SE entities subsidiaries ventures Associates1

Loans and Receivables – – 3,642 – 8,669 293 4,328 0 Valuation allowances on impaired loans and receivables – – – – – – – – of which additions in current year – – – – – – – – Obligations – – 11,034 0 11,199 251 121 – Interest income – – 2 – 83 7 46 – Interest expense – – –102 – –199 –2 – – Goods and services provided 0 – 1,158 0 3,677 33 437 1 Goods and services received – – 9,146 – 7,894 46 512 –

1 Separate presentation of associated companies

The “Other related parties in the group of consolidated entities” column includes, in addition to sister entities, joint ventures and associates that are related parties in Volkswagen AG’s group of consolidated entities but do not directly belong to VW FS AG. The relationships with the Supervisory Board and the Board of Management comprise relationships with the relevant groups of people at VW FS AG and the Group parent company Volkswagen AG. As in the prior year, relationships with pension plans and the State of Lower Saxony were of lesser significance.

In the year under review, VW FS AG received no capital contributions from Volkswagen AG (previous year: €1,617 million). However, VW FS AG and its subsidiaries provided capital contributions to related parties of €75 million (previous year: €137 million).

Members of the Board of Management and Supervisory Board of VW FS AG are also members of management and supervisory boards of other entities in the Volkswagen Group with which VW FS AG sometimes conduct transactions in the normal course of business. All transactions with these related parties are on an arm’s­length basis. During the course of the reporting period, standard short­term bank loans amounting to an average total of €179 million (previous year: €138 million) were granted to related parties as part of dealer financing.

BOARD OF MANAGEMENT REMUNERATION IN ACCO RDANC E W I T H IAS 2 4

€ million 2020 2019

Short­term benefits 3 6 Benefits based on performance shares 2 2 Termination benefits – – Post­employment benefits 1 10

The benefits based on performance shares for the fiscal year included expenses of €2 million (previous year: €2 million) for the performance shares granted to the members of the Board of Management. The total remu­ neration of the Board of Management in accordance with the HGB amounted to €5 million (previous year: €8 million); 9,195 performance shares were granted in the reporting period (previous year: 10,974), the fair value of which was €2 million (previous year: €2 million) on the grant date.

Volkswagen Financial Services AG | Annual Report 2020 158 Notes to the Consolidated Financial Statements Consolidated Financial Statements

The total payments made to former members of the Board of Management and their surviving dependants amounted to €0.8 million (previous year: €0.7 million); the provisions recognized for this group of people to cover current pensions and pension entitlements amounted to €13 million (previous year: €15 million).

SUPERVISORY BOARD RE MUNERAT ION In accordance with a resolution passed by the Annual General Meeting, the members of the Supervisory Board are entitled to an annual allowance. This allowance is independent of the performance of the Company and the Supervisory Board role undertaken by the person concerned. Various members of the Supervisory Board are also members of the supervisory boards of other Volkswagen AG subsidiaries. The amounts received for these functions is deducted from the allowance entitlement from VW FS AG. As a result, a total amount of less than €0.04 million (previous year: €0.04 million) was paid out to the members of the Supervisory Board in the re­ porting period. The employee representatives on the Supervisory Board of VW FS AG also receive their regular salaries un­ der the terms of their employment contracts. This salary is based on the provisions in the Betriebsverfas­ sungsgesetz (BetrVG – German Works Constitution Act) and is an appropriate remuneration for the relevant function or activity in the Company. The same also applies to the representative of the senior executives on the Supervisory Board.

70. Disclosures Relating to Unconsolidated Structured Entities

A structured entity is normally designed so that voting rights or similar rights are not the deciding factor in determining control over the entity.

Typical features of a structured entity are as follows: > Limited scope of activities > Narrowly defined business purpose > Inadequate equity to finance the business activities > Financing through a number of instruments that contractually bind investors and that give rise to a concen­ tration of credit risk and other risks

In the reporting year, VW FS AG maintained business relationships with structured entities in connection with acquired subordinated loans that were terminated at the end of the year. These were ABS special purpose enti­ ties within Volkswagen AG’s group of consolidated entities. The entities carry out a process of securitization by taking assets from lending agreements and leases for vehicles and transforming them into securities (asset­ backed securities) on a maturity­matched basis. In the VW FS AG Group, the subordinated loans have been allocated to assets measured at fair value through profit or loss. Under the principles specified in IFRS 10, the ABS special purpose entities were not controlled by VW FS AG and are therefore not included in the consolidat­ ed financial statements. The acquisition of subordinated loans granted by ABS special purpose entities in the Volkswagen AG group of consolidated entities means that the financial services business of the associated entities was funded within the Volkswagen AG group of consolidated entities. The acquisition of the subordinated loans gave rise to default risk in connection with the assets contained in the securitized portfolio and to interest­rate risk. The maximum risk exposure of VW FS AG arising from its interests in unconsolidated structured entities was limited to the fair value of the subordinated loans reported in the balance sheet.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 159

The following table contains disclosures on VW FS AG’s assets reported in the previous year’s balance sheet that are related to unconsolidated structured entities and the maximum risk exposure of the VW FS AG Group (dis­ regarding collateral). The nominal amount of the securitized assets is also disclosed.

ABS SPECIAL PURPOSE ENTITIES

€ million 2019

Reported in the balance sheet as of December 31 Loans to and receivables from customers1 34 Maximum loss risk 34 Nominal volume of securitized assets 411

1 Subordinated loans granted

VW FS AG did not provide unconsolidated structured entities with any non­contractual support during the reporting period.

Volkswagen Financial Services AG | Annual Report 2020 160 Notes to the Consolidated Financial Statements Consolidated Financial Statements

71. Governing Bodies of Volkswagen Financial Services AG

The members of the Board of Management are as follows:

LARS HENNER SANTELMA NN Chairman of the Board of Management Corporate Management China, Germany and Europe regions Mobility Unit (until July 31, 2020) Sales and Marketing

DR. ALEXANDRA BAU M­CEISIG (AS O F AUGUST 1, 2020) Human Resources and Organization International region

DR. MARIO DABERKOW Information Technology and Processes South America & Mexico regions

FRANK FIEDLER Finance and Purchasing

CHRISTIANE HESSE (UNT I L JULY 3 1, 2 0 2 0 ) Human Resources and Organization International region

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 161

The members of the Supervisory Board of VW FS AG are as follows:

FRANK WITTER DR. CHRISTIAN DAHLHE I M ( A S O F FEBRUARY 1 , 2 0 2 0 ) Chairman Head of Group Sales of Volkswagen AG Member of the Board of Management of Volkswagen AG IMELDA LABBÈ (UNTIL JANUARY 3 1 , 2 0 2 0 ) Finance and IT Head of Group After Sales Volkswagen AG Kassel

DR. ARNO ANTLITZ SIMONE MAHLER Deputy Chairman Chairwoman of the Joint Works Council of Member of the Board of Management of AUDI AG Volkswagen Financial Services AG and Finance and Legal Affairs Volkswagen Bank GmbH

DANIELA CAVALLO PETRA REINHEIMER Deputy Chairwoman Deputy Chairwoman of the Joint Works Council Chairwoman of the General and Group Works of Volkswagen Financial Services AG and Councils of Volkswagen AG Volkswagen Bank GmbH

JOACHIM DREES (UNTIL JULY 1 5 , 20 2 0 ) HANS­JOACHIM ROTHENP IELER (UNTIL FEBRUARY 2 9 , Chief Executive Officer of MAN SE and 2 0 2 0 ) MAN Truck & Bus SE Member of the Board of Management of AUDI AG Member of the Executive Board of TRATON SE Technical Development

MICHAEL GROSCHE DR. HANS PETER SCHÜTZINGER Head of Fleet, Mobility and Remarketing Chief Executive Officer of of Volkswagen Financial Services AG Porsche Holding GmbH Salzburg

MATTHIAS GRÜNDLER (A S O F DECEMBER 1 , 2 0 2 0 ) ALEXANDER SEITZ (SINC E MARCH 1 , 2 0 2 0 ) Chief Executive Officer of TRATON SE Member of the Volkswagen Brand Board of Management, Controlling and ANDREAS KRAUß Accounting Executive Director of the Joint Works Council of Volkswagen Financial Services AG and EVA STASSEK Volkswagen Bank GmbH 1. Principal Representative of IG Metall Braunschweig

Volkswagen Financial Services AG | Annual Report 2020 162 Notes to the Consolidated Financial Statements Consolidated Financial Statements

72. Letter of Comfort for Our Affiliated Companies

With the exception of political risks, Volkswagen Financial Services AG hereby declares that, as the shareholder of its affiliated companies, over which it has managerial control and/or in which it holds a direct or indirect majority share of the share capital, it will exert its influence to ensure that the latter meet their liabilities to lenders in the agreed manner. Moreover, Volkswagen Financial Services AG confirms that, for the term of the loans, it will make no changes to the share structures of these companies which would adversely affect the letter of comfort without informing the lenders. This comfort also applies to holders of unguaranteed bonds issued by the following affiliated companies: Banco Volkswagen S.A., São Paulo, Brazil; Volkswagen Finance (China) Co., Ltd., Beijing, China; Volkswagen Finance Pvt. Ltd., Mumbai, India; Volkswagen Doğuş Finans­ man A.Ş., Kağıthane­Istanbul, Turkey; Volkswagen Doğuş Faktoring A.Ş., Kağıthane­Istanbul, Turkey.

73. Events After the Balance Sheet Date

There were no significant events in the period between December 31, 2020 and February 15, 2021.

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 163

Shareholdings

Shareholdings of Volkswagen Financial Services AG and the Volkswagen Financial Services Group in accordance with sections 285 and 313 of the HGB and presentation of the companies included in the consolidated financial statements of the Volkswagen Financial Services Group in accordance with IFRS 12 as of December 31, 2020.

PROFIT/ EXCHANGE VW FS AG’S EQUITY LOSS I N RATE INTEREST IN CAPITAL I N T HOU­ THOU­ (1 EURO = ) I N % SANDS SANDS

Name and registered office of the local company Currency Dec. 31, 2020 Direct Indirect Total local currency currency Footnote Year

I. PARENT COMPANY VOLKSWAGEN FINANCIAL SERVICES AG, Braunschweig

II. SUBSIDIARIES A. Consolidated companies 1. Germany EURO­Leasing GmbH, Sittensen EUR 100.00 – 100.00 23,284 – 1) 2020 Vehicle Trading International (VTI) GmbH, Braunschweig EUR 100.00 – 100.00 2,763 – 1) 2020 Volim Volkswagen Immobilien Vermietgesellschaft für VW­/Audi­ Händlerbetriebe mbH, Braunschweig EUR 100.00 – 100.00 26 – 1) 2020 Volkswagen Insurance Brokers GmbH, Braunschweig EUR 100.00 – 100.00 54,829 – 1) 2020 Volkswagen Leasing GmbH, Braunschweig EUR 100.00 – 100.00 270,712 – 1) 12) 2020 Volkswagen Versicherung AG, Braunschweig EUR 100.00 – 100.00 97,055 – 1) 2020 Volkswagen­Versicherungsdienst GmbH, Braunschweig EUR 100.00 – 100.00 54,369 – 1) 2020

2. International Autofinance S.A., Luxembourg SEK 10.0247 – – – 300 – 13) 2019 Banco Volkswagen S.A., São Paulo BRL 6.3756 – 100.00 100.00 2,627,089 635,950 2019 Consórcio Nacional Volkswagen ­ Administradora de Consórcio Ltda., São Paulo BRL 6.3756 – 100.00 100.00 628,101 90,546 2019 Driver Australia Three Pty. Ltd., Ashfield AUD 1.5861 – – – –3,191 –1,210 13) 2019 Driver Brasil four Banco Volkswagen Fundo de Investimento em Direitos Creditórios Financiamento de Veículos, Osasco BRL 6.3756 – – – 826,698 24,408 4) 13) 2019

Driver China Eleven Auto Loan Securitization Trust, Beijing CNY 8.0290 – – – – – 4) 6) 13) 2020 Driver China Nine Auto Loan Securitization Trust, Beijing CNY 8.0290 – – – – – 4) 13) 2019 Driver China Ten Auto Loan Securitization Trust, Beijing CNY 8.0290 – – – – – 4) 6) 13) 2020 Driver UK Master S.A., Luxembourg GBP 0.8993 – – – 29 – 3) 13) 2019

Volkswagen Financial Services AG | Annual Report 2020 164 Notes to the Consolidated Financial Statements Consolidated Financial Statements

PROFIT/ EXCHANGE VW FS AG’S EQUITY LOSS I N RATE INTEREST IN CAPITAL I N T HOU­ THOU­ (1 EURO = ) I N % SANDS SANDS

Name and registered office of the local company Currency Dec. 31, 2020 Direct Indirect Total local currency currency Footnote Year

Driver UK Multi­Compartment S.A., Luxembourg GBP 0.8993 – – – 29 – 3) 13) 2019 Euro­Leasing A/S, Padborg DKK 7.4405 – 100.00 100.00 488 –14,505 2019 Euro­Leasing Sp. z o.o., Kolbaskowo PLN 4.5562 – 100.00 100.00 –368 –4,907 2019 MAN Financial Services España S.L., Coslada EUR – 100.00 100.00 25,509 –237 2019 MAN Financial Services GmbH, Eugendorf EUR – 100.00 100.00 26,620 2,137 2019 MAN Financial Services Poland Sp. z o.o., Nadarzyn PLN 4.5562 100.00 – 100.00 60,746 4,114 10) 2019 MAN Location & Services S.A.S., Evry EUR 100.00 – 100.00 6,727 –203 2019 OOO Volkswagen Bank RUS, Moscow RUB 91.7754 99.00 – 99.00 16,250,171 1,258,821 10) 2019 OOO Volkswagen Group Finanz, Moscow RUB 91.7754 100.00 – 100.00 3,818,758 435,287 2019 ŠkoFIN s.r.o., Prague CZK 26.2390 – 100.00 100.00 7,057,000 408,000 2019 Trucknology S.A., Luxembourg EUR – – – 1 – 13) 2019 VCL Master Residual Value S.A., Luxembourg EUR – – – 31 – 13) 2019 VCL Master S.A., Luxembourg EUR – – – 31 – 13) 2019 VCL Multi­Compartment S.A., Luxembourg EUR – – – 31 – 13) 2019 Volkswagen Bank S.A., Institución de Banca Múltiple, Puebla MXN 24.4115 100.00 – 100.00 2,046,000 184,000 2019 Volkswagen Corretora de Seguros Ltda., São Paulo BRL 6.3756 – 100.00 100.00 21,040 –42,090 2019 Volkswagen Finance (China) Co., Ltd., Beijing CNY 8.0290 100.00 – 100.00 13,752,768 862,456 2019 Volkswagen Finance Belgium S.A., Bruxelles EUR – 100.00 100.00 48,120 6,278 2019 Volkswagen Finance Overseas B.V., Amsterdam EUR 100.00 – 100.00 2,866,073 –2,965 2019 Volkswagen Finance Pvt. Ltd., Mumbai INR 89.6900 91.00 9.00 100.00 13,166,929 –244,643 3) 2020 Volkswagen Financial Leasing (Tianjin) Co., Ltd., Tianjin CNY 8.0290 – 100.00 100.00 581,130 –77,404 2019 Volkswagen Financial Services (UK) Ltd., Milton Keynes GBP 0.8993 – 100.00 100.00 1,775,510 238,095 10) 2019 Volkswagen Financial Services Australia Pty. Ltd., Chullora AUD 1.5861 100.00 – 100.00 311,364 34,246 9) 2019 Volkswagen Financial Services Ireland Ltd., Dublin EUR – 100.00 100.00 –11,933 –6,660 2019 Volkswagen Financial Services Japan Ltd., Tokyo JPY 126.5100 – 100.00 100.00 22,317,729 3,060,712 2019

Volkswagen Financial Services Korea Co., Ltd., Seoul KRW 1,336.2100 100.00 – 100.00 326,745,000 13,266,000 2019 Volkswagen Financial Services N.V., Amsterdam EUR – 100.00 100.00 1,265,233 10,584 2019 Volkswagen Financial Services Polska Sp. z o.o., Warsaw PLN 4.5562 100.00 – 100.00 41 –9 4) 12) 2019

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 165

PROFIT/ EXCHANGE VW FS AG’S EQUITY LOSS I N RATE INTEREST IN CAPITAL I N T HOU­ THOU­ (1 EURO = ) I N % SANDS SANDS

Name and registered office of the local company Currency Dec. 31, 2020 Direct Indirect Total local currency currency Footnote Year

Volkswagen Financial Services S.p.A., Mailand EUR 100.00 – 100.00 106,219 27,106 2019 Volkswagen Finans Sverige AB, Södertälje SEK 10.0247 – 100.00 100.00 2,072,350 194 2019 Volkswagen Holding Financière S.A., Villers­Cotterêts EUR – 100.00 100.00 196,295 653 2019 Volkswagen Insurance Services, Correduria de Seguros, S.L., El Prat de Llobregat EUR – 100.00 100.00 17,448 9,038 2019 Volkswagen Leasing S.A. de C.V., Puebla MXN 24.4115 100.00 – 100.00 10,775,047 1,617,385 2019 Volkswagen New Mobility Services Investment Co., Ltd., Beijing CNY 8.0290 100.00 – 100.00 1,051,908 6,139 2019 Volkswagen Participações Ltda., São Paulo BRL 6.3756 – 100.00 100.00 3,366,623 613,067 2019 Volkswagen Renting, S.A., Alcobendas (Madrid) EUR – 100.00 100.00 97,255 6,037 2019 Volkswagen Renting, Unipessoal, Lda., Amadora EUR – 100.00 100.00 5,302 2,211 2018 Volkswagen Serviços Ltda., São Paulo BRL 6.3756 – 100.00 100.00 44,066 –2,780 2019

B. Unconsolidated companies 1. Germany carmobility GmbH, Braunschweig EUR 100.00 – 100.00 10,396 – 1) 2020 LogPay Financial Services GmbH, Eschborn EUR 100.00 – 100.00 12,674 – 1) 11) 2020 LogPay Mobility Services GmbH, Eschborn EUR – 100.00 100.00 20 – 2019 LogPay Transport Services GmbH, Eschborn EUR – 100.00 100.00 3,312 1,265 2019 Rent­X GmbH, Braunschweig EUR 100.00 – 100.00 33,024 – 1) 2020 sunhill technologies GmbH, Erlangen EUR – 100.00 100.00 – –12,602 2019 Volkswagen Payment Systems GmbH, Munich EUR – 100.00 100.00 5,761 –734 2019 Voya GmbH, Hamburg EUR 100.00 – 100.00 – – 7) 2020

2. International Adaptis Solutions Ltd., Hatfield GBP 0.8993 – 100.00 100.00 508 342 2019 Connect Cashless Parking Ltd., Liverpool GBP 0.8993 – 100.00 100.00 72 –84 3) 2019 Fleetzil Locações e Serviços Ltda., Curitiba BRL 6.3756 – 100.00 100.00 46,215 11,828 2019

INIS International Insurance Service s.r.o., ve zkratce INIS s.r.o., Mladá Boleslav CZK 26.2390 – 100.00 100.00 37,728 32,228 2019 LogPay Charge & Fuel Slovakia s.r.o., Bratislava EUR – 100.00 100.00 – – 4) 6) 2020

Volkswagen Financial Services AG | Annual Report 2020 166 Notes to the Consolidated Financial Statements Consolidated Financial Statements

PROFIT/ EXCHANGE VW FS AG’S EQUITY LOSS I N RATE INTEREST IN CAPITAL I N T HOU­ THOU­ (1 EURO = ) I N % SANDS SANDS

Name and registered office of the local company Currency Dec. 31, 2020 Direct Indirect Total local currency currency Footnote Year

LogPay Fuel Czechia s.r.o., Prague CZK 26.2390 – 100.00 100.00 286 –214 2019 LogPay Fuel Italia S.r.l., Bolzano EUR – 100.00 100.00 115 42 2019 LogPay Fuel Spain S.L., Barcelona EUR – 100.00 100.00 579 90 2019 Mobile Payment Services S.A.S., Boulogne­Billancourt EUR – 100.00 100.00 334 –893 2019 OOO Volkswagen Financial Services RUS, Moscow RUB 91.7754 100.00 – 100.00 6,112,289 1,197,385 2019 PayByPhone Ltd., Hatfield GBP 0.8993 – 100.00 100.00 16,902 12,796 2019 PayByPhone Suisse AG, Düdingen CHF 1.0811 – 100.00 100.00 – – 7) 2020 PayByPhone Technologies Inc., Vancouver / BC CAD 1.5628 – 100.00 100.00 8,116 –33,420 2019 PayByPhone US Inc., Wilmington / DE USD 1.2276 – 100.00 100.00 0 – 4) 5) 2019 Simple Way Locações e Serviços Ltda., Curitiba BRL 6.3756 – 100.00 100.00 22,142 4,747 2019 Softbridge ­ Projectos Tecnológicos S.A., Porto Salvo EUR – 60.00 60.00 2,700 385 2019 sunhill technologies Italy S.R.L., Verona EUR – 100.00 100.00 59 –317 2019 Truckparking B.V., in liquidation, Utrecht EUR 79.11 – 79.11 276 –3,089 2) 2019 Truckparking LLC, in Liquidation, Arlington / VA USD 1.2276 – 100.00 100.00 –119 –39 2) 2019 VAREC Ltd., Tokyo JPY 126.5100 – 100.00 100.00 611,914 98,279 2019 Volkswagen Administradora de Negócios Ltda., São Paulo BRL 6.3756 – 100.00 100.00 47,105 11,024 2019 Volkswagen Brokers Argentina S.A., Buenos Aires ARS 103.2880 – 96.00 96.00 66,741 47,384 2018 Volkswagen Financial Ltd., Milton Keynes GBP 0.8993 – 100.00 100.00 0 – 5) 2019 Volkswagen Financial Services Hellas A.E., Athens EUR 100.00 – 100.00 2,274 –542 2019 Volkswagen Financial Services Holding Argentina S.R.L., Buenos Aires ARS 103.2880 99.99 0.01 100.00 685,721 –188,580 2018 Volkswagen Financial Services Schweiz AG, Wallisellen CHF 1.0811 – 100.00 100.00 7,436 2,722 2019 Volkswagen Financial Services Taiwan Ltd., Taipei TWD 34.4845 – 100.00 100.00 1,059,180 130,167 2019 Volkswagen FS France S.A.S., Roissy­ en­France EUR – 100.00 100.00 100 – 8) 2019 Volkswagen Insurance Brokers, Agente de Seguros y de Fianzas, S.A. de C.V., Puebla MXN 24.4115 – 100.00 100.00 –46,864 9,369 2019 Volkswagen Insurance Company DAC, Dublin EUR 100.00 – 100.00 37,786 –2,290 2019

Volkswagen Insurance Service (Great Britain) Ltd., Milton Keynes GBP 0.8993 – 100.00 100.00 1,396 657 2019 Volkswagen Insurance Services Korea Co., Ltd., Seoul KRW 1,336.2100 – 100.00 100.00 1,050,203 591,682 2019

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 167

PROFIT/ EXCHANGE VW FS AG’S EQUITY LOSS I N RATE INTEREST IN CAPITAL I N T HOU­ THOU­ (1 EURO = ) I N % SANDS SANDS

Name and registered office of the local company Currency Dec. 31, 2020 Direct Indirect Total local currency currency Footnote Year

Volkswagen International Insurance Agency Co., Ltd., Taipei TWD 34.4845 – 100.00 100.00 35,178 28,928 2019 Volkswagen Leasing (Beijing) Co., Ltd., Beijing CNY 8.0290 – 100.00 100.00 8,380 –23,167 2019 Volkswagen Leasing (Dalian) Co., Ltd., Dalian CNY 8.0290 – 100.00 100.00 3,831 848 2019 Volkswagen Leasing (Guangzhou) Co., Ltd., Guangzhou CNY 8.0290 – 100.00 100.00 –1,465 –777 2019 Volkswagen Leasing (Nanjing) Co., Ltd., Nanjing CNY 8.0290 – 100.00 100.00 –4,087 –2,112 2019 Volkswagen Leasing (Shanghai) Co., Ltd., Shanghai CNY 8.0290 – 100.00 100.00 7,873 –17,841 2019 Volkswagen Leasing (Suzhou) Co., Ltd., Suzhou CNY 8.0290 – 100.00 100.00 –263 –1,284 2019 Volkswagen Leasing (Wuxi) Co., Ltd., Wuxi CNY 8.0290 – 100.00 100.00 953 –275 2019 Volkswagen Mobility Services S.p.A., Bolzano EUR – 100.00 100.00 – – 4) 6) 2020 Volkswagen New Mobility Services Consulting (Beijing) Co., Ltd., Beijing CNY 8.0290 – 100.00 100.00 15,470 –4,020 2019 Volkswagen Payments S.A., Strassen EUR 100.00 – 100.00 18,370 –8,582 2019 Volkswagen Reinsurance Company DAC, Dublin EUR 100.00 – 100.00 6,897 –1,816 2019 Volkswagen Service Sverige AB, Södertälje SEK 10.0247 – 100.00 100.00 40,970 5,605 2019 Volkswagen Servicios, S.A. de C.V., Puebla MXN 24.4115 – 100.00 100.00 24,183 3,456 2019 Volkswagen Serwis Ubezpieczeniowy Sp. z o.o., Warsaw PLN 4.5562 – 100.00 100.00 61,220 26,313 2019 Voya Travel Technologies S.R.L., Bukarest RON 4.8685 – 100.00 100.00 – – 7) 2020

VTXRM ­ Software Factory Lda., Porto Salvo EUR – 90.00 90.00 2,949 383 2019

III. JOINT VENTURES A. Equity­accounted companies 1. Germany Mobility Trader Holding GmbH, Berlin EUR 44.44 – 44.44 88,029 1,109 2019 Volkswagen Autoversicherung Holding GmbH, Braunschweig EUR 51.00 – 51.00 117,254 4,534 2019 Volkswagen Financial Services Digital Solutions GmbH, Braunschweig EUR 49.00 – 49.00 77,147 22,642 2019

Volkswagen Financial Services AG | Annual Report 2020 168 Notes to the Consolidated Financial Statements Consolidated Financial Statements

PROFIT/ EXCHANGE VW FS AG’S EQUITY LOSS I N RATE INTEREST IN CAPITAL I N T HOU­ THOU­ (1 EURO = ) I N % SANDS SANDS

Name and registered office of the local company Currency Dec. 31, 2020 Direct Indirect Total local currency currency Footnote Year

2. International MAN Financial Services (SA) (RF) (Pty) Ltd., Johannesburg ZAR 18.0152 50.00 – 50.00 154,562 24,567 10) 2019 VDF Servis ve Ticaret A.S., Istanbul TRY 9.1013 51.00 – 51.00 291,880 55,256 2019 Volkswagen D'Ieteren Finance S.A., Bruxelles EUR – 50.00 50.00 140,238 5,792 2019 Volkswagen Doguş Finansman A.S., Istanbul TRY 9.1013 51.00 – 51.00 223,181 –52,612 2019 Volkswagen Financial Services South Africa (Pty) Ltd., Sandton ZAR 18.0152 51.00 – 51.00 –175,205 –576,006 2019 Volkswagen Møller Bilfinans A/S, Oslo NOK 10.4574 – 51.00 51.00 3,246,512 240,908 10) 2019 Volkswagen Pon Financial Services B.V., Amersfoort EUR – 60.00 60.00 175,806 22,610 9) 12) 2019

B. Companies accounted for at cost 1. Germany FleetCompany GmbH, Oberhaching EUR 60.00 – 60.00 9,732 –277 2019

2. International Collect Car B.V., Rotterdam EUR – 60.00 60.00 8,057 1,407 2019 Lenkrad Invest (Pty) Ltd., Sandton ZAR 18.0152 51.00 – 51.00 30,054 25,209 2019 Porsche Volkswagen Servicios Financieros Chile S.p.A., Santiago de Chile CLP 872.1700 50.00 – 50.00 2,300,190 890,882 2019 Shuttel B.V., Leusden EUR 49.00 – 49.00 3,038 235 2019 Volkswagen Financial Services Compañia Financiera S.A., Buenos Aires ARS 103.2880 – 49.00 49.00 1,981,623 739,733 2019

Volkswagen Losch Financial Services S.A., Luxembourg EUR 60.00 – 60.00 2,387 –332 2019 Volkswagen Semler Finans Danmark A/S, Bröndby DKK 7.4405 – 51.00 51.00 213,736 –8,865 4) 2019

IV. ASSOCIATES A. Equity­accounted associates 1. Germany

2. International

B. Associates accounted for at cost 1. Germany Digital Mobility Leasing GmbH, Kassel EUR 26.00 – 26.00 – – 7) 2020

Volkswagen Financial Services AG | Annual Report 2020 Consolidated Financial Statements Notes to the Consolidated Financial Statements 169

PROFIT/ EXCHANGE VW FS AG’S EQUITY LOSS I N RATE INTEREST IN CAPITAL I N T HOU­ THOU­ (1 EURO = ) I N % SANDS SANDS

Name and registered office of the local company Currency Dec. 31, 2020 Direct Indirect Total local currency currency Footnote Year

2. International Kuwy Technology Service Pvt. Ltd., Chennai INR 89.6900 – 25.10 25.10 115,993 –83,409 3) 2020 Volkswagen­Versicherungsdienst GmbH, Vienna EUR – 15.00 15.00 4,195 3,717 2019

V. EQUITY INVESTMENTS 1. Germany Allianz für die Region GmbH, Braunschweig EUR 8.70 – 8.70 997 –8 2019 PosernConnect GmbH, Sittensen EUR – 49.00 49.00 954 577 2019 Verimi GmbH, Berlin EUR 3.00 – 3.00 54,793 –28,661 2018 2. International

1 ) Profit­and­loss transfer agreement 2 ) In liquidation 3 ) Different fiscal year 4 ) Short fiscal year 5 ) Currently not trading 6 ) Newly established company 7 ) Newly acquired company 8 ) Started trading in 2020 9 ) Consolidated financial statments 10 ) Figures in accordance with IFRSs 11 ) Profit­and­loss transfer agreement as of 2020 12 ) Matter within the meaning of section 1 of the UmwG 13 ) Structured company in accordance with IFRS 10 and IFRS 12

Volkswagen Financial Services AG | Annual Report 2020 170 Notes to the Consolidated Financial Statements Consolidated Financial Statements

Braunschweig, February 15, 2021

Volkswagen Financial Services AG The Board of Management

Lars Henner Santelmann Dr. Mario Daberkow

Frank Fiedler Dr. Alexandra Baum­Ceisig

Volkswagen Financial Services AG | Annual Report 2020 Responsibility Statement 171

Responsibility Statement

To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the management report of the Group includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group.

Braunschweig, February 15, 2021

Volkswagen Financial Services AG The Board of Management

Lars Henner Santelmann Dr. Mario Daberkow

Frank Fiedler Dr. Alexandra Baum­Ceisig

Volkswagen Financial Services AG | Annual Report 2020 172 Independent Auditor’s Report

Independent Auditor’s Report

(Translation of the German independent auditor’s report concerning the audit of the con­ solidated financial statements and group management report prepared in German)

To VOLKSWAGEN FINANCIAL SERVICES AKTIENGESELLSCHAFT, Braunschweig

REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATE MENTS AND OF THE GRO UP MANAGEMENT REPORT

OPINIONS We have audited the consolidated financial statements of VOLKSWAGEN FINANCIAL SERVICES AKTIENGESELL­ SCHAFT, Braunschweig, and its subsidiaries (the Group), which comprise the consolidated income statement, and the consolidated statement of comprehensive income, consolidated balance sheet as at 31 December 2020, consolidated statement of changes in equity and consolidated cash flow statement for the fiscal year from 1 January 2020 to 31 December 2020, and notes to the consolidated financial statements, including a summary of significant accounting policies, as well as the segment reporting in the notes to the consolidated financial statements. In addition, we have audited the group management report of VOLKSWAGEN FINANCIAL SERVICES AKTIENGESELLSCHAFT, which is combined with the Company’s management report, for the fiscal year from 1 January 2020 to 31 December 2020. In accordance with the German legal requirements, we have not audited the content of the corporate governance declaration pursuant to Sec. 289f (4) in conjunction with Sec. 289f (2) No. 4 HGB [“Handelsgesetzbuch”: German Commercial Code] included in the Human Resources Report section of the group management report (disclosures on the quota for women on executive boards).

In our opinion, on the basis of the knowledge obtained in the audit,

► the accompanying consolidated financial statements comply, in all material respects, with the IFRSs as adopted by the EU, and the additional requirements of German commercial law pursuant to Sec. 315e (1) HGB and, in compliance with these requirements, give a true and fair view of the assets, liabilities and financial position of the Group as at 31 December 2020 and of its financial performance for the fiscal year from 1 January 2020 to 31 December 2020, and

► the accompanying group management report as a whole provides an appropriate view of the Group’s position. In all material respects, this group management report is consistent with the consolidated financial statements, complies with German legal requirements and appropriately presents the oppor­ tunities and risks of future development. Our opinion on the group management report does not cov­ er the content of the corporate governance declaration referred to above.

Pursuant to Sec. 322 (3) Sentence 1 HGB, we declare that our audit has not led to any reservations relating to the legal compliance of the consolidated financial statements and of the group management report.

Basis for the opinions We conducted our audit of the consolidated financial statements and of the group management report in ac­ cordance with Sec. 317 HGB and the EU Audit Regulation (No 537/2014, referred to subsequently as “EU Audit Regulation”) and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Our respon­

Volkswagen Financial Services AG | Annual Report 2020 Independent Auditor’s Report 173

sibilities under those requirements and principles are further described in the “Auditor’s responsibilities for the audit of the consolidated financial statements and of the group management report” section of our audi­ tor’s report. We are independent of the group entities in accordance with the requirements of European law and German commercial and professional law, and we have fulfilled our other German professional responsibilities in accordance with these requirements. In addition, in accordance with Art. 10 (2) f) of the EU Audit Regulation, we declare that we have not provided non­audit services prohibited under Art. 5 (1) of the EU Audit Regulation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions on the consolidated financial statements and on the group management report. Key audit matters in the audit of the consolidated financial statements Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the fiscal year from 1 January 2020 to 31 December 2020. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon; we do not provide a separate opinion on these matters.

Below, we describe what we consider to be the key audit matters:

Determination of the expected residual values of lease assets during impairment testing

Reasons why the matter was determined to be a key audit matter

Lease assets comprise vehicles under current leases. There is an impairment risk for these vehicles which is primarily dependent on the residual value expected at the end of the lease. The expected residual value of these vehicles is a significant area which is subject to estimation uncertainty and in which the executive directors of VOLKSWAGEN FINANCIAL SERVICES AKTIENGESELLSCHAFT exercise judgment.

The expected residual value is reviewed quarterly using internal and external marketing results and on the basis of estimates of future market price development.

In light of the existing estimation uncertainty, the judgment exercised in determining the residual values and the significance of the amount for impairment testing, the determination of expected residual values was a key audit matter. As it is not possible to make a conclusive assessment of the impact of the global COVID­19 pan­ demic, the estimation uncertainty in relation to the determination of the expected residual values is signifi­ cantly heightened.

Auditor’s response

During our audit, we analyzed the process implemented by the executive directors of VOLKSWAGEN FINANCIAL SERVICES AKTIENGESELLSCHAFT for monitoring and determining the residual values to identify any risks of material misstatement and obtained an understanding of the process steps and controls. On this basis, we tested the operating effectiveness of the implemented controls over the determination of the expected residual values. To assess the forecasting model used to determine the residual values, we assessed the validation plan on the basis of the model design and analyzed the validation procedures performed and the backtesting results as to whether any need for an impairment allowance was identified and whether there had been an unusual number of outliers. Furthermore, we assessed whether the assumptions underlying the forecasting model and the inputs used for determining the expected residual values were clearly documented. We obtained evidence for the main inputs and assumptions used for age, mileage and lifecycle phase of the vehicles to determine the residual values and examined them for currentness and transparency. We assessed whether the marketing assumptions used reflect current marketing results and industry­specific and general market expectations.

Our audit procedures did not lead to any reservations relating to the determination of the expected residual values of the lease assets during impairment testing.

Reference to related disclosures

Volkswagen Financial Services AG | Annual Report 2020 174 Independent Auditor’s Report

The disclosures of the VOLKSWAGEN FINANCIAL SERVICES AKTIENGESELLSCHAFT Group on the recognition and measurement policies applied for lease assets are contained in note “13. Leases” and the disclosures on the determination of the residual values of lease assets in note “18. Estimates and Assumptions by Management” of the notes to the consolidated financial statements. The effects of the COVID­19 pandemic on the residual values is presented in the notes to the consolidated financial statements under “Impact of the COVID­19 Pan­ demic.”

Other information The Supervisory Board is responsible for the Report of the Supervisory Board. In all other respects, the execu­ tive directors are responsible for the other information. The other information comprises the corporate gov­ ernance declaration pursuant to Sec. 289f (4) HGB (disclosures on the quota for women on executive boards). The other information also comprises additional parts of the annual report of which we received a version before issuing this auditor’s report, such as the Report of the Supervisory Board and the Responsibility State­ ment, but not the consolidated financial statements, not the group management report disclosures whose content is audited and not our auditor’s report thereon.

Our opinions on the consolidated financial statements and on the group management report do not cover the other information, and consequently we do not express an opinion or any other form of assurance conclusion thereon.

In connection with our audit, our responsibility is to read the other information and, in so doing, to consider whether the other information

• is materially inconsistent with the consolidated financial statements, with the group management report or our knowledge obtained in the audit, or • otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other in­ formation, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the executive directors and the Supervisory Board for the consolidated financial statements and the group management report The executive directors are responsible for the preparation of the consolidated financial statements that com­ ply, in all material respects, with IFRSs as adopted by the EU and the additional requirements of German com­ mercial law pursuant to Sec. 315e (1) HGB, and that the consolidated financial statements, in compliance with these requirements, give a true and fair view of the assets, liabilities, financial position and financial perfor­ mance of the Group. In addition, the executive directors are responsible for such internal control as they have determined necessary to enable the preparation of consolidated financial statements that are free from materi­ al misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the executive directors are responsible for assessing the Group’s ability to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for financial reporting based on the going concern basis of accounting unless there is an intention to liquidate the Group or to cease operations, or there is no realistic alternative but to do so.

Furthermore, the executive directors are responsible for the preparation of the group management report that, as a whole, provides an appropriate view of the Group’s position and is, in all material respects, consistent with the consolidated financial statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, the executive directors are responsible for such arrangements and measures (systems) as they have considered necessary to enable the preparation of a group management report that is in accordance with the applicable German legal requirements, and to be able to provide sufficient appropriate evidence for the assertions in the group management report.

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The Supervisory Board is responsible for overseeing the Group’s financial reporting process for the preparation of the consolidated financial statements and of the group management report.

Auditor’s responsibilities for the audit of the consolidated financial statements and of the group management report Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and whether the group management report as a whole provides an appropriate view of the Group’s position and, in all material respects, is con­ sistent with the consolidated financial statements and the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor’s report that includes our opinions on the consolidated financial statements and on the group management report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Sec. 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always detect a material misstatement. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and this group management report.

We exercise professional judgment and maintain professional skepticism throughout the audit. We also:

> Identify and assess the risks of material misstatement of the consolidated financial statements and of the group management report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. > Obtain an understanding of internal control relevant to the audit of the consolidated financial statements and of arrangements and measures (systems) relevant to the audit of the group management report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of these systems. > Evaluate the appropriateness of accounting policies used by the executive directors and the reasonableness of estimates made by the executive directors and related disclosures. > Conclude on the appropriateness of the executive directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the related disclo­ sures in the consolidated financial statements and in the group management report or, if such disclosures are inadequate, to modify our respective opinions. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to be able to continue as a going concern. > Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements present the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the assets, liabili­ ties, financial position and financial performance of the Group in compliance with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to Sec. 315e (1) HGB. > Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express opinions on the consolidated financial statements and on the group management report. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinions. > Evaluate the consistency of the group management report with the consolidated financial statements, its conformity with [German] law, and the view of the Group’s position it provides. > Perform audit procedures on the prospective information presented by the executive directors in the group management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the sig­

Volkswagen Financial Services AG | Annual Report 2020 176 Independent Auditor’s Report

nificant assumptions used by the executive directors as a basis for the prospective information, and evaluate the proper derivation of the prospective information from these assumptions. We do not express a separate opinion on the prospective information and on the assumptions used as a basis. There is a substantial una­ voidable risk that future events will differ materially from the prospective information.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with the relevant inde­ pendence requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence and where applicable, the related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter.

OTHER LEGAL AND REGU LATORY REQUIREMENTS Report on the assurance in accordance with Sec. 317 (3b) HGB on the electronic reproduction of the consolidat­ ed financial statements and the group management report prepared for publication purposes

Opinion

We have performed assurance work in accordance with Sec. 317 (3b) HGB to obtain reasonable assurance about whether the reproduction of the consolidated financial statements and the group management report (herein­ after the “ESEF documents”) contained in the attached electronic file “Volkswagen Financial Ser­ vices_AG_KA+KLB_ESEF­2020­12­31.zip” and prepared for publication purposes complies in all material re­ spects with the requirements of Sec. 328 (1) HGB for the electronic reporting format (“ESEF format”). In accordance with German legal requirements, this assurance only extends to the conversion of the information contained in the consolidated financial statements and the group management report into the ESEF format and therefore relates neither to the information contained in this reproduction nor to any other information con­ tained in the abovementioned electronic file.

In our opinion, the reproduction of the consolidated financial statements and the group management report contained in the abovementioned attached electronic file and prepared for publication purposes complies in all material respects with the requirements of Sec. 328 (1) HGB for the electronic reporting format. We do not express any opinion on the information contained in this reproduction nor on any other information con­ tained in the abovementioned file beyond this reasonable assurance opinion and our audit opinion on the accompanying consolidated financial statements and the accompanying group management report for the fiscal year from 1 January 2020 to 31 December 2020 contained in the “Report on the audit of the consolidated financial statements and of the group management report” above.

Basis for the opinion

We conducted our assurance work on the reproduction of the consolidated financial statements and the group management report contained in the abovementioned attached electronic file in accordance with Sec. 317 (3b) HGB and Exposure Draft of IDW Assurance Standard: Assurance in Accordance with Sec. 317 (3b) HGB on the Electronic Reproduction of Financial Statements and Management Reports Prepared for Publication Purposes (ED IDW AsS 410). Our responsibilities under that standard are further described in the “Group auditor’s re­ sponsibilities for the assurance work on the ESEF documents” section. Our audit firm applied the requirements for quality control systems set forth in IDW Standard on Quality Control: “Requirements for Quality Control in Audit Firms” (IDW QS 1).

Volkswagen Financial Services AG | Annual Report 2020 Independent Auditor’s Report 177

Responsibilities of the executive directors and the Supervisory Board for the ESEF documents

The executive directors of the Company are responsible for the preparation of the ESEF documents including the electronic reproduction of the consolidated financial statements and the group management report in accordance with Sec. 328 (1) Sentence 4 No. 1 HGB and for the tagging of the consolidated financial statements in accordance with Sec. 328 (1) Sentence 4 No. 2 HGB.

In addition, the executive directors of the Company are responsible for such internal control as they have con­ sidered necessary to enable the preparation of ESEF documents that are free from material non­compliance with the requirements of Sec. 328 Abs. 1 HGB for the electronic reporting format, whether due to fraud or error.

The executive directors of the Company are also responsible for the submission of the ESEF documents togeth­ er with the auditor’s report and the attached audited consolidated financial statements and the audited group management report as well as other documents to be published to the operator of the Bundesanzeiger [German Federal Gazette].

The Supervisory Board is responsible for overseeing the preparation of the ESEF documents as part of the fi­ nancial reporting process.

Group auditor’s responsibilities for the assurance work on the ESEF documents

Our objective is to obtain reasonable assurance about whether the ESEF documents are free from material non­ compliance with the requirements of Sec. 328 (1) HGB, whether due to fraud or error. We exercise professional judgment and maintain professional skepticism throughout the engagement. We also:

• Identify and assess the risks of material non­compliance with the requirements of Sec. 328 (1) HGB, whether due to fraud or error, design and perform assurance procedures responsive to those risks, and obtain assurance evidence that is sufficient and appropriate to provide a basis for our assurance opin­ ion. • Obtain an understanding of internal control relevant to the assurance on the ESEF documents in order to design assurance procedures that are appropriate in the circumstances, but not for the purpose of expressing an assurance opinion on the effectiveness of these controls. • Evaluate the technical validity of the ESEF documents, i.e., whether the electronic file containing the ESEF documents meets the requirements of Delegated Regulation (EU) 2019/815, in the version valid as of the reporting date, on the technical specification for this electronic file. • Evaluate whether the ESEF documents enable an XHTML reproduction with content equivalent to the audited consolidated financial statements and to the audited group management report. • Evaluate whether the tagging of the ESEF documents with Inline XBRL technology (iXBRL) enables an appropriate and complete machine­readable XBRL copy of the XHTML reproduction.

Further information pursuant to Art. 10 of the EU Audit Regulation We were elected as group auditor by the Annual General Meeting on 2 March 2020. We were engaged by the Supervisory Board on 19 November 2020. We have served as group auditor of VOLKSWAGEN FINANCIAL SER­ VICES AKTIENGESELLSCHAFT, Braunschweig, for the first time.

We declare that the opinions expressed in this auditor’s report are consistent with the additional report to the Audit Committee pursuant to Art. 11 of the EU Audit Regulation (long­form audit report).

Volkswagen Financial Services AG | Annual Report 2020 178 Independent Auditor’s Report

GERMAN PUBLIC AU DITOR RESPONSIBLE FO R THE ENGAGEMENT

The German Public Auditor responsible for the engagement is Martin Werthmann.

Hannover, 17 February 2021

Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft

Werthmann Prof. Dr. Schellhorn Wirtschaftsprüfer Wirtschaftsprüfer [German Public Auditor] [German Public Auditor]

Volkswagen Financial Services AG | Annual Report 2020 Report of the Supervisory Board 179

Report of the Supervisory Board

of Volkswagen Financial Services AG

In the year under review, the Supervisory Board gave regular and thorough consideration to the position and development of Volkswagen Financial Services AG and the Volkswagen Financial Services AG Group. ­ The Supervisory Board generally comprises twelve members. Changes in the reporting period are disclosed in the information on governing bodies. The Supervisory Board held three regular meetings and one extraordinary meeting in the reporting year. The average attendance rate was 96%. Decisions were made on seven matters by means of a written resolution circulated to each of the members for approval; the Chairman of the Supervisory Board also made eight urgent decisions using the written procedure.

COMMITTEE ACTIVITIES The Supervisory Board of Volkswagen Financial Services AG is not subject to an obligation to establish commit­ tees. Instead, the full Supervisory Board is responsible for performing the tasks of an audit committee pursuant to Article 39(2) of Directive 2014/56/EU in conjunction with section 107(3) of the Aktiengesetz (AktG – German Stock Corporation Act). In this regard, the Supervisory Board held detailed discussions in the reporting period, addressing the su­ pervision of the internal control, risk management and internal audit systems as well as the monitoring of the financial reporting and auditing process.

MATTERS DISCUSSED BY THE SUPERVISORY BOARD At its meeting on February 13, 2020, following reports submitted by the auditor, the Supervisory Board exam­ ined in detail and then approved both the consolidated financial statements of the Volkswagen Financial Services AG Group and the annual financial statements and management report of Volkswagen Financial Services AG for 2019 prepared by the Board of Management. The Supervisory Board also issued a recommendation regarding the appointment of the auditor for 2020. Furthermore, the Board of Management reported to the Supervisory Board on the funding strategy of the Volkswagen Financial Services subgroup and necessary adjustments in relation to Strategy 2025. The Supervi­ sory Board also received updates on the status of the Operational Excellence initiative launched in 2018. At this meeting, the Board of Management informed the Supervisory Board about the current situation regarding the hey.car used vehicle platform and the plans for further expansion in European countries outside Germany. The Supervisory Board approved the market launch of Mobility Trader Holding GmbH in Spain. Under a further agenda item at the meeting on February 13, 2020, the Supervisory Board consented to the acquisition of a park­ ing services provider in Switzerland by the PayByPhone Group. At the extraordinary Supervisory Board meeting on April 8, 2020 and at the ordinary Supervisory Board meet­ ing on July 2, 2020, the Board of Management reported to the Supervisory Board on the crisis scenarios arising from the Covid­19 pandemic and the potential impact on the business of Volkswagen Financial Services AG. At the meetings on July 2, 2020 and November 19, 2020, the Board of Management presented the Supervisory Board with comprehensive reports about the economic and financial position of the Company and the Volkswagen Financial Services subgroup. At the meeting of the Supervisory Board held on July 2, 2020, the Board of Management reported in detail on the Company’s latest position. This report focused particularly on current positioning in the market and on the

Volkswagen Financial Services AG | Annual Report 2020 180 Report of the Supervisory Board

strategy in the mobility services offered by the Company, for example in connection with parking and fleet customer business. At the meeting held on November 19, 2020, the Board of Management reported to the Supervisory Board on the new strategy for the used vehicle business. In addition, the Supervisory Board received an explanation from the Chief Compliance Officer regarding the information on the risk classification of the international subsidiaries and the relevant risk categories derived from the internal control system. The Supervisory Board also addressed the implementation status of action plans in the Together4Integrity program at Volkswagen Financial Services AG. Under another agenda item, the Head of Internal Audit presented the key areas of activity in the reporting year. Various reasons for audits, such as submissions via the Whistleblower System, were also discussed in this context. Finally, the Head of Internal Audit set out the planned audits for 2021. The Chief Digital Officer also informed the Supervisory Board about the latest implementation status of dig­ italization at Volkswagen Financial Services AG and about the product and customer groups at the focus of these activities. In addition, the Board of Management provided an IT status report. This mainly consisted of presentations on the status of key IT projects and IT security.

AUDIT OF THE ANNUAL AND CONSOLIDATED FINANCIAL STATEMENTS Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft was appointed to audit both the consolidated financial statements of the Volkswagen Financial Services AG Group in accordance with the IFRS and the annual financial statements of Volkswagen Financial Services AG in accordance with HGB for the year ended December 31, 2020, including the bookkeeping system and management reports. The consolidated financial statements of the Volkswagen Financial Services AG Group in accordance with the IFRS and the annual financial statements of Volkswagen Financial Services AG in accordance with HGB for the year ended December 31, 2020, together with the management reports, were submitted to the Supervisory Board. The auditor, Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, audited these financial statements, including the bookkeeping system and the management reports, and issued an unqualified auditor’s opinion in each case. The Supervisory Board agrees with the findings of these audits. The Supervisory Board had no reservations after its review of the consolidated financial statements and the annual financial statements, including the management reports. The auditors were present when this agenda item was addressed at the Supervisory Board meeting and they reported on the main findings of their audit. At its meeting on February 19, 2021, the Supervisory Board approved both the consolidated financial state­ ments and annual financial statements of Volkswagen Financial Services AG prepared by the Board of Man­ agement. The consolidated financial statements and annual financial statements have thus been adopted. Under the current control and profit­and­loss transfer agreement, the loss reported by Volkswagen Financial Services AG in accordance with the HGB for fiscal year 2020 was absorbed by Volkswagen AG. The Supervisory Board would like to take this opportunity to express its gratitude and appreciation for the work of the members of the Board of Management, the Works Council, the managerial staff and all employees of Volkswagen Financial Services AG and its affiliated companies. The high level of commitment from all of you has helped to sustain the ongoing growth of Volkswagen Financial Services AG.

Braunschweig, February 19, 2021

Frank Witter Chairman of the Supervisory Board

Volkswagen Financial Services AG | Annual Report 2020

PUBLISHED BY Volkswagen Financial Services AG Gifhorner Straße 57 38112 Braunschweig, Germany

Telephone + 49 (0) 531 212­0 [email protected] https://www.vwfs.com/en.html

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VOLKSWAGEN FINANCIAL SERVICES AG Gifhorner Strasse 57 ∙ 38112 Braunschweig ∙ Germany ∙ Phone +49 (0) 531 212­0 [email protected] ∙ www.vwfs.com/en.html ∙ www.facebook.com/vwfsde Investor Relations: Phone +49 (0) 531 212­30 71 ∙ [email protected]